Exchange rates Flashcards
define exchange rates
price of one currency in terms of another at a given time
Factors affecting demand for a currency
interest rates: increase in interest rates increase demand for currency and exchange rate rises / as to put savings in banks foreigners must buy with their domestic currency + inverse
interest rates in other countries: savers may choose to place money in foreign banks due to higher interest rates, buy foreign currency increase flow of currency into foreign market increasing supply and reducing exchange rate + inverse
currency speculators: speculators are firms, individuals or financial institutions buy and sell currencies in hope of making profit, attract as prices of currencies may vary dramatically - actual effect buy more increase demand drives up exchange rate
sell currency in exchange for other if expect price will fall which increases supply in foriegn exchange markets and lower exchange rates
Demand for exports: firms sell g&s to foreigners expect to be paid in their own currencies therefore increases demand for currency results in increase of exchange rate (diagram ER/Q of currency) / movement of investment capital foreign MNC wants to build factory/ increase in inward FDI = increase demand for currenccy = increase exchange rate
Demand for imports: imported g&s are bought with foreign currency increasing flow of pounds into foreign exchgange marketss increasing supply/ increase outward FDI MNCs develop abroad = reduces exhange rate
define depreciate & devalued
depreciate: of a currency where the value of a currency falls owing to market forces resulting in the exchange rate falling
devalued: if a currency when a government fixes a new lower exchange rate.
impact of exchange rate depreciation
export: price falls demand increases
import: price rises demand decreases improving current account
Effectiveness of government exchange rate policy depends on price elasticity of demand of exports and imports
