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Questions and Answers
What is the primary difference in transactions between domestic and foreign residents in an open economy?
Where does the foreign exchange market physically take place?
What is the primary function of an exchange rate?
How can the price of one country's currency be expressed?
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What is the primary topic discussed in the given text?
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What does a rise in the Ethiopian birr per US dollar exchange rate from 9.22 to 9.30 indicate?
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If the exchange rate is expressed as the price of the foreign currency in terms of the domestic currency, what does an increase from $0.11 per birr to $0.12 per birr signify?
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Which currency is described as a "vehicle currency" in the text?
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According to the passage, which of the following is NOT mentioned as one of the most important foreign exchange centers?
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What has further facilitated communication among foreign exchange participants and economic agents, according to the text?
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Study Notes
Foreign Exchange Rate & Market
- In an open economy, international trade involves different currencies, requiring importers to buy foreign currencies with their domestic currency in the foreign exchange market.
- The foreign exchange market is a worldwide market where national currencies are traded, comprising commercial banks, foreign exchange brokers, and authorized agents.
- The market is facilitated by advanced communication technologies, such as telephones, online computers, telex, fax, and video conferencing.
Exchange Rate
- The exchange rate is the price of one country's money in units of another country's money, acting as a translator between different currencies.
- Exchange rates can be expressed in two ways:
- Domestic currency units per unit of foreign exchange (e.g., 9.22 birr per 1 USD)
- Foreign currency units per unit of domestic currency (e.g., 0.11 USD per 1 birr)
Characteristics of the Foreign Exchange Market
- The foreign exchange market is a global market comprising commercial banks, foreign exchange brokers, and authorized agents trading in most world currencies.
- Major foreign exchange centers include London, New York, Tokyo, Singapore, and Frankfurt.
- The US dollar is the most widely traded currency, known as a vehicle currency due to its widespread use in international transactions, including oil and primary commodity pricing.
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Description
Test your knowledge on the foreign exchange rate and market in an open economy. Learn about the differences in transaction of goods and services between domestic and foreign residents, as well as the involvement of foreign currencies in international trade.
