Some Key Terms Flashcards
What is an exchange rate?
An exchange rate is the rate at which one country’s currency can be exchanged for other currencies on the foreign exchange market, i.e. the price of one currency in terms of another.
What is the acronym for remembering how the ‘strength’ of a currency impacts exports and imports?
S P I C E D (Strong Pound Imports Dearer Exports Dearer)
How does a change in exchange rate impact the value of currencies?
Any movement in exchange rates impacts the value of BOTH currencies.
What is depreciation?
Depreciation refers to the weakening of a currency in the context of a free or managed floating exchange rate system due to market forces or intervention by the central bank via changes in monetary policy.
What is devaluation?
Devaluation refers to the weakening of a currency when a government decides that a currency is overvalued and changes the official rate at which it is fixed and is committed to maintaining the new official exchange rate. It can only happen when a country has pegged its currency to another currency or basket of currencies.
What is revaluation?
Revaluation refers to the strengthening of a currency when a government decides that a currency is undervalued and changes the official rate at which it is fixed and is committed to maintaining the new official exchange rate. It can only happen when a country has pegged its currency to another currency or basket of currencies.
How does a strong currency impact UK consumers and producers?
A strong currency is good for UK consumers as they can buy products cheaply from abroad, but it is bad for UK producers as it makes the goods they produce expensive to export.
What is the difference between depreciation and devaluation?
Depreciation refers to the weakening of a currency in the context of a free or managed floating exchange rate system, while devaluation refers to the weakening of a currency when a government decides that a currency is overvalued and changes the official rate at which it is fixed.
What is the difference between appreciation and revaluation?
Appreciation refers to the strengthening of a currency in the context of a free or managed floating exchange rate system, while revaluation refers to the strengthening of a currency when a government decides that a currency is undervalued and changes the official rate at which it is fixed.
