Exchange Rates Quiz

Exchange Rates: A Detailed Overview

• Exchange rate is the rate at which one currency will be exchanged for another currency

• Currencies can be national, sub-national, or supra-national

• Exchange rate is also considered as the value of one country's currency in relation to another currency

• Each country determines the exchange rate regime that will apply to its currency

• In floating exchange rate regimes, exchange rates are determined in the foreign exchange market

• Retail currency exchange market involves different buying and selling rates quoted by money dealers

• Currency for international travel and cross-border payments is predominantly purchased from banks, foreign exchange brokerages, and various forms of bureaux de change

• Market convention rules the notation used to communicate the fixed and variable currencies in a quotation

• Countries are free to choose which type of exchange rate regime they will apply to their currency

• The real exchange rate (RER) is the purchasing power of a currency relative to another at current exchange rates and prices

• The RER generally reaches a steady level in the long-term and any substantial and persistent RER deviation from its long-run equilibrium level has shown to produce negative impacts on a country's balance of payments

• RER misalignment and, in particular, overvaluation can undermine the country's export-oriented development strategyExchange Rate Summary

• The equilibrium RER is not a fixed value and follows the trend of key economic fundamentals.

• The PPP doctrine has been debated as it may signal a natural RER movement towards its new equilibrium as a RER misalignment.

• Two popular approaches to find an alternative equilibrium RER measure are the Fundamental Equilibrium Exchange Rate (FEER) and the Behavioural Equilibrium Exchange Rate (BEER).

• The FEER represents a RER consistent with macroeconomic balance, characterized by internal and external balances achieved simultaneously.

• The BEER entails an econometric analysis of the RER behavior, considering significant RER deviations from its PPP equilibrium level as a consequence of changes in key economic fundamentals.

• An effective exchange rate is a weighted average of a basket of foreign currencies and can be viewed as an overall measure of the country's external competitiveness.

• A parallel exchange rate (or black market, grey, unregulated, unofficial, etc. exchange rate) responds to excess demand for foreign currency at the official exchange rate.

• The Uncovered Interest Rate Parity Model (UIRP) states that an appreciation or depreciation of one currency against another currency might be neutralized by a change in the interest rate differential.

• The Balance of Payments Model holds that foreign exchange rates are at an equilibrium level if they produce a stable current account balance.

• The Asset Market Model views currencies as asset prices traded in an efficient financial market.

• A country may gain an advantage in international trade if it controls the market for its currency to keep its value low.

• The People's Republic of China has been periodically accused of exchange rate manipulation.

Test your knowledge on exchange rates with our detailed overview quiz! Learn about the basics of exchange rates, including how they are determined and the different exchange rate regimes. Explore the concept of the real exchange rate, its effects on a country's balance of payments, and the debate surrounding the equilibrium RER. Discover popular approaches to finding alternative equilibrium RER measures, such as the Fundamental Equilibrium Exchange Rate and the Behavioural Equilibrium Exchange Rate. Finally, learn about different models and theories used to explain exchange