Exchange rates

16 flashcards · Economics · by Addaneye

1. Exchange rate definition

   The value of one currency in relation to another

2. 6 factors influencing exchange rates

   Imports and exports Speculation Relative interest rates Relative inflation rates FDI Quantitative easing

3. How do imports and exports affect a country's exchange rate?

   Decrease in imports >decrease in supply for currency >appreciation of exchange rate Decrease in exports >decrease in demand for currency > depreciation of exchange rate

4. What is speculation?

   When investors predict changes in a currency's exchange rate to make a profit

5. How does speculation affect a country's exchange rate?

   Speculation of future exchange rates may affect exchange rates now as investors will be rushing to buy/sell currency

6. How do relative interest rates affect the exchange rate?

   High relative interest rates >increase in hot money flows into country >increase in demand for currency >appreciation Low relative interest rates >increase in hot money flows out of country >increase in supply of currency >depreciation

7. How do relative inflation rates affect the exchange rate?

   Low relative inflation rates >goods are relatively cheaper >increase in exports >increase in demand for currency >appreciation High relative inflation rates >goods are relatively more expensive >decrease in exports >decrease in demand for currency >depreciation

8. How does FDI affect the exchange rate?

   Increase in FDI into a country >increase in demand for that currency >appreciation Decrease in FDI into a country >decrease demand for that currency >depreciation

9. What is quantitative easing?

   When central banks create new money to buy financial assets from high street banks to increase these banks' money supply which encourages lending

10. How does quantitative easing affect the exchange rate?

    Quantitative easing >increase in money supply >depreciation

11. What are four impacts of changes in exchange rates?

    Growth and employment Inflation FDI flows

12. What is the J-Curve?

    While we would expect a depreciation of the exchange rate to improve the current account in the short run, import demand is inelastic and so the current account would worsen and then improve in the long run

13. What is the Marshall-Lerner condition?

    The point at which the current account will start to improve on the J-Curve. It is when PEDX + PEDM >1

14. What are two ways of managing exchange rates?

    Interest rates Foreign currency transactions

15. How can a country use foreign currency transactions to mange its exchange rate?

    If a country sells another country's currency in exchange for its own, they would increase the demand for their currency, appreciating it.

16. What are the impacts of competitive depreciation?

    Can cause a currency war Can increase the price of imports