Flashcards
Exchange rates
Cards in this deck (11)
- 1Bi-lateral exchange rateprice of one currency measure in terms of other currencies
- 2Freely floating exchange rate- value of currency determined by demand and supply
- 3Appreciationincrease in the value of the exchange rate relative to another currency
- 4Depreciationof the currency occurs when there is a fall in the value of the exchange rate relative to another currency
- 5Causes of changes in the exchange rate- foreign demand for a country's exports
- domestic demand for imports
- relative interest rates
- relative inflation rates (high inflation, low demand for export, low exchange rate)
- investment from overseas: foreign direct investment (FDI), portfolio investment
- speculation - 6effects of exchange rate changes- employment (appreciating currency decreases employment)
- inflation (higher unemployment and higher exchange rate will decrease inflation)
- economic growth (fall- lower exports/ higher unemployment
- balance of payments (worsens X becomes smaller, M bigger)
- Customers (higher PP)
- Exporters (worsens)
- Importers (gain) (Depends on PED(M) - 7Government intervention- fixed rate system (buying/selling foreign currency)
- revaluation (increasing EX rate)
- devaluation (decreasing EX) - 8Managed exchange rates (managed float)- government/central monetary authority intervene periodically to prevent large and sudden fluctuations
- 9Overvalued currency- advantages: Imported goods cheaper keeping inflation down, domestic producers forced to be efficient
- disadvantages: exports less competitive, negative impact on balance of payments - 10Undervalued currency- Advantages: exports cheaper, imports more expensive (switch to domestic)
- Disadvantages: imports more expensive (imported inflation also raw materials) - 11Evaluation of different exchange rate systems- fixed: no uncertainty (encouraging trade and exchange, decreases speculation)
- reduces ability to use monetary policy to affect economy
- opportunity cost of large amounts on foreign exchange reserves on a daily basis
Information
- Description
- International Baccalaureate Economics (International Economics) Flashcards on Exchange rates, created by Jonas Schlicht on 23/04/2016.
- Created by
- Jonas Schlicht
- Views
- 0
- Rating
More on Balance of Payments and Exchange Rates