5) Causes of Exchange Rate Changes - MMT Flashcards

1
Q

what is an x-rate?

A

price of one currency in the terms of another

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2
Q

if a country’s currency is allowed to float freely, what will happen to the exchange rate?

A

its exchange rate will be changing constantly due to variations in demand and supply of the currency on the FOREX

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3
Q

If the exchange rate is semi fixed, what will happen to the value of the currency?

A

only allowed within a narrow range (eg 2+ or - an agreed level), in this situation the country’s central bank will actively manage and influence the exchange rate

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4
Q

all x-rates, whether freely floating or managed will be determined by…

A

demand and supply of the currency (these are 2 sides of the same coin, the demand for one currency equates to the supply of another), eg if £ and $ were the only 2 currencies then to demand $ you would need to supply £s

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5
Q

what 6 factors affect exchange rates?

A
  • inflation
  • interest rate
  • current account deficit
  • terms of trade
  • public debts
  • political stability and economic performance
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6
Q

what happens when interest rates increase?

A

Exchange rates increase

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7
Q

what happens when interest rates fall?

A

exchange rates fall

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8
Q

why odes a higher interest rate mean a higher exchange rate?

A

hot money wants to get into, D for currency increases

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9
Q

what does a higher interest rate mean for inflation?

A

lower inflation, meaning a higher demand for exports, and a higher demand for currency

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10
Q

if the government is high in debt, what happens to the exchange rate?

A

fall in the x rate

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11
Q

why does high government debt mean a fall in the x rate? 3 things

A
  • large scale deficit financing to pay for G
  • less attractive to foreign investors, seek out stable countries with strong economic performance, in which to invest their capital
  • large debt encourages inflation, if inflation is high, the real value of the currency falls, which means the currency is less attractive/less demand
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12
Q

why does political turmoil mean a fall in the x rate?

A

loss of confidence in a currency, a movement of capital to the currencies of more stable countries (capital flight)

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13
Q

what does a high trade surplus mean for the x rate?

A
  • (X > M), high demand for currency so strong x rate
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14
Q

what does a high trade deficit mean for the x rate?

A

(M>X) associated with high supply of currency so weak x rate

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15
Q

what does a quicker increase export prices relative to import prices mean for the exchange rate?

A

if export prices rise more quickly than import prices, this may indicate stronger demand for currency, therefore high x-rate

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16
Q

what does a quicker increase in import prices relative to export prices mean for the exchange rate?

A

lower demand for currency therefore lower x rate