Theme4:4.1.8-Exchange rates

Question 1

types of exchange rates

Answer 1

floating system
managed float
fixed system

Question 2

floating system

Answer 2

value of currency determined by supply and demand for currency e.g. the UK

Question 3

managed float

Answer 3

value of currency set my supply and demand and some intervention by central bank via interest rates and buying and selling currency

Question 4

fixed system

Answer 4

value of currency set by government at a fixed rate against another currency e.g. Japanese Yen

Question 5

fixed system

Answer 5

value of currency set by government at a fixed rate against another currency and it doesn’t change

Question 6

revaluation vs devaluation

Answer 6

revaluation is the increases of the value of a currency against another in a fixed system

devaluation is the decrease of the value of a currency against another in a fixed system

Question 7

appreciation vs depreciation

Answer 7

appreciation- increase in the value of a currency in a floating system

depreciation-decrease in the value of a currency in a floating system

Question 8

factors that influence floating exchange rates

Answer 8

demand for the pound
supply of the pound

Question 9

demand of the pound includes..

Answer 9

-amount of british goods foreigners want to buy
-amount of foreigners who want to invest
-amount of foreigners who want to put money in british banks
-amount of foreigners that come to the UK for holiday
-speculation on the £

Question 10

supply of the pound includes…

Answer 10

-the amount of foreign goods to be bought
-British people who want to invest abroad
-British people who want to save money in foreign banks
-British people who want to go on holiday
-speculation on the £

Question 11

government intervention methods to influence exchange rates

Answer 11

interest rates-high interest rates more demand for the pound and it appreciates vice versa

gold and foreign currency exchange- value of £ too high they can buy foreign currency which increases the supply of the £

Question 12

what is competitive devaluation/depreciation

Answer 12

when a country deliberately weakens the value of its currency to become more competitive

Question 13

positive consequence of competitive devaluation

Answer 13

can increase exports and decrease imports which will improve balance of payments assuming Marshall-Lerner condition

Question 14

negative consequence of competitive devaluation

Answer 14

weak exchange rate may lead to inflation which reduces competitiveness and can worsen balance of payments

Question 15

Marshall-Lerner condition

Answer 15

states that price elasticities of imports and exports must be more than 1 in order for a devaluation to have a positive effect of trade balance

Question 16

what is the j-curve

Answer 16

a diagram which shows that over time with devaluation the current account balance worsens before it improves because demand is inelastic in the short run and elastic in the long run

Question 17

j-curve diagram

Question 18

what does a change in exchange rates impact

Answer 18

-the current account and balance of payments
-inflation
-economic growth and employment/unemployment
-FDI flows