Exchange Rates Overview

A floating exchange rate is a currency value that is determined by the market forces of supply and demand relative to other currencies.

A fall in the price of the Australian dollar generally leads to a depreciation, making exports cheaper and imports more expensive.

An increase in US interest rates relative to Australian interest rates would likely lead to a decrease in demand for Australian dollars as investors may prefer to invest in the US for higher returns.

<p>An increase in inbound tourism would typically increase the demand for Australian dollars as foreign tourists exchange their currencies for AUD.</p> Signup and view all the answers

<p>A significant disadvantage of a floating exchange rate system is the uncertainty it creates regarding future currency values, which can affect international trade planning.</p> Signup and view all the answers

<p>In a floating exchange rate system, the balance of payments is kept in equilibrium as the current account deficit is offset by a surplus in the capital finance account.</p> Signup and view all the answers

<p>In a floating exchange rate system, there is no need for a country to hold large amounts of foreign reserves, allowing domestic monetary policy to operate independently.</p> Signup and view all the answers

<p>The main consequence is that the supply of the currency exceeds demand, resulting in an excess supply that the government must manage.</p> Signup and view all the answers

<p>An undervalued currency increases the money supply, which can lead to more spending and investment, thus stimulating economic growth.</p> Signup and view all the answers

<p>A significant factor is the necessity for a stock of international reserves or gold to support the fixed rate.</p> Signup and view all the answers

<p>One major disadvantage is that it can lead to internal instability, such as inflation, if balance of payments surpluses or deficits occur.</p> Signup and view all the answers

<p>Minor fluctuations of up to 1 percent are permitted without prior approval from the IMF.</p> Signup and view all the answers

<p>The government's decision to discontinue the US dollar's convertibility into gold significantly contributed to the disintegration of the fixed exchange rate system.</p> Signup and view all the answers

<p>Speculation can destabilize a fixed exchange rate system, as investors might bet against the currency, anticipating its devaluation.</p> Signup and view all the answers

<p>A fixed exchange rate provides stability and predictability, encouraging the growth of international trade.</p> Signup and view all the answers

<p>A government may fix its currency above market equilibrium to create a strong currency perception and attract foreign investment.</p> Signup and view all the answers

<p>The value of a currency is determined by the forces of supply and demand in the foreign exchange market.</p> Signup and view all the answers

<p>High demand for exports increases demand for the country's currency, causing its value to rise.</p> Signup and view all the answers

<p>A managed float is a floating exchange rate system where a central bank intervenes to buy or sell a nation’s currency.</p> Signup and view all the answers

<p>The government can enter the foreign exchange market and buy its own currency to increase its value.</p> Signup and view all the answers

<p>An advantage is that it allows for automatic adjustments in the economy based on supply and demand.</p> Signup and view all the answers

<p>A disadvantage is that it can lead to higher volatility and uncertainty in currency values.</p> Signup and view all the answers

<p>A falling exchange rate can lead to higher inflation by increasing the cost of imported goods.</p> Signup and view all the answers

<p>A declining currency value can reduce investor confidence, making them hesitant to invest in that economy.</p> Signup and view all the answers

<p>When demand for a currency decreases, its price will float downwards.</p> Signup and view all the answers