T6 ER's Flashcards
What is an exchange rate
The rate at which one currency trades against another
How does the value of the exchange rate change
The demand on it
What is a exchange rate index
the measure of the exchange rate using a basket of goods approach
What is a real exchange rate
The rate adjusted for inflation
What is a floating exhange rate
Where the currency is determined by markert forces
What is a fixed excahnge rate
Where the gov intervenes in the value of the exchange rate to keep it set alevel against other currencies
What factors affect the ER(6)
Interest rates Eco growtrh inflation Confidence Current account deficit or surplus Internation comp
What are the affects of a appreciation of ER’s(3)
Inc export prices Cheaper imports Reduced inflation (DP) Lower eco growth Worsening of current account deficit
Affects of a depreiciating ER(4)
Exports inc
DP inflation
Imports more expensive
Cost push inflation
What are the advantages of a free floating ER(3)
No need for as much currency reserve Able to use monetary policy on the domsetic economy, without worry of affecting ER Helps macro adjustment Can help correct deficit Less risk of currency speculation
Disadvantages of a floating ER(2)
Puts off trade, FDI, etc
Self correction of trade deficiits are very unlinkely
Inflation can increase
Adv of a fixed ER(2)
No exchange rate uncertainty
Increases domestic inovation,as exporters must keep competitive as they cannot rely on afall in the exchange rate
Dis of a fixed ER
Can cause inability to use interest rates for other things
Macro conflicts
Large leevls of currency reserves needed - can be too expensive
ER can be under or overvalued
What changes the demand for an ER
Level of exports
Interest rates
Level of FDI
Speculation
What changes the supply of a currency
Level of imports
Fall in FDI
inc availability of currency on FOREX market
Less speculation
Selling currency mroe on FOREX market
