Exchange Rate Systems

False (B)

depreciation

<p>exchange rate</p> Signup and view all the answers

<p>Floating = Currency value changes with market demand and supply. Fixed = Central Bank pegs currency to another currency. Managed = Central Bank intervenes to stabilize the currency. Appreciation = Increase in the value of a currency.</p> Signup and view all the answers

<p>HK$ 7.75 = US$ 1 (A)</p> Signup and view all the answers

<p>False (B)</p> Signup and view all the answers

<p>To determine the preferred currency value and intervene in forex markets.</p> Signup and view all the answers

<p>raise</p> Signup and view all the answers

<p>Political stability (C)</p> Signup and view all the answers

<p>False (B)</p> Signup and view all the answers

<p>Its exports become cheaper.</p> Signup and view all the answers

<p>appreciation</p> Signup and view all the answers

<p>Devaluation = Decrease in the strength of a currency Interest rate increase = Currency appreciation through attracting foreign currency Speculation = Buying currency in expectation of its future value increase Managed exchange rate = Combination of fixed and floating mechanisms</p> Signup and view all the answers

<p>Creates demand for the currency, leading to appreciation.</p> Signup and view all the answers

<p>Increase in import prices (D)</p> Signup and view all the answers

<p>True (A)</p> Signup and view all the answers

<p>It states that for a depreciation to improve the current account balance, the combined elasticity of exports and imports must be greater than 1.</p> Signup and view all the answers

<p>cost push</p> Signup and view all the answers

<p>Current Account = Imports become more expensive Economic Growth = Increase in net exports Inflation = Cost push inflation likely occurs Living Standards = Higher prices and less choice</p> Signup and view all the answers

<p>FDI increases as foreign firms find investments cheaper (A)</p> Signup and view all the answers

<p>False (B)</p> Signup and view all the answers

<p>It describes the time lag between currency depreciation and improvement in the current account balance.</p> Signup and view all the answers

<p>exports</p> Signup and view all the answers

<p>Worsening of the current account balance (B)</p> Signup and view all the answers

The price of one currency in terms of another. For example, £1 = €1.18.

A system where the value of a currency is determined by supply and demand in the foreign exchange market.

An increase in the value of a currency in a floating exchange rate system.

A decrease in the value of a currency in a floating exchange rate system.

A system where a country's central bank sets a fixed value for its currency against another currency, usually a major currency like the US dollar.

The deliberate lowering of a country's currency value to make its exports cheaper and imports more expensive.

A situation where a country's currency value rises, making its exports more expensive and imports cheaper.

The idea that a currency depreciation will only improve a country's trade balance if the combined elasticity of demand for exports and imports is greater than 1.

The principle stating that lowering prices for products with price-elastic demand (sensitive to price changes) can increase total revenue (exports in this case).

The time lag between a currency depreciation and the improvement in a country's trade balance.

The component of a country's balance of payments that tracks the flow of goods, services, and income.

The combined effect of all goods and services produced within a country's borders over a specific period.

A situation where prices rise due to increased production cost.

A situation where prices rise due to increased demand.

Investment from foreign companies into a country.

A system where the central bank sets a target exchange rate for its currency against another currency, but allows it to fluctuate within a specific range. The central bank intervenes buying or selling its currency in the forex market to keep the rate within the range.

When a central bank intentionally weakens its currency against another currency by setting a new, lower exchange rate.

When a central bank intentionally strengthens its currency against another currency by setting a new, higher exchange rate.

The central bank intervenes by selling its own currency in the forex market. This increases the supply of its currency and reduces its value, bringing it back within the targeted range.

The central bank intervenes by buying its own currency in the forex market using its foreign reserves. This increases the demand for its currency and increases its value, bringing it back within the targeted range.

Interest rates can be used to influence the value of a currency. Raising interest rates makes a currency more attractive to foreign investors, which increases demand and appreciates the currency.

Interest rates can also be used to influence the value of a currency. Lowering interest rates makes a currency less attractive to foreign investors, which reduces demand and depreciates the currency.

The relative inflation rates between two countries can affect exchange rates. If a country experiences higher inflation than its trading partners, its exports become more expensive, reducing demand and causing the currency to depreciate.

Foreign direct investment (FDI) into a country increases demand for its currency. This can lead to appreciation, while FDI by companies within the country creating a supply of their currency can lead to depreciation.

Currency speculation occurs when traders buy or sell a currency in the expectation that its value will increase or decrease, allowing them to make a profit.