Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

economics > exchange rates > Flashcards

exchange rates Flashcards

1
Q

What is foreign exchange?

A

international transactions involving the use of different countries national currencies

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is an exchange rate?

A

value of one currency in terms of another currency in a floating market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is depreciation?

A

decrease in the value of the currency

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is appreciation?

A

increase in the value of the currency

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is devaluation?

A

if the currency value is higher than what can be maintained, governments may change it to a lower value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is a floating exchange rate system?

A

when exchange rates are determined by the forces of demand and supply with no government intervention

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is revaluation?

A

if the currency value is lower than what can be maintained, governments may change it to a higher value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is speculation?

A

buying and selling currency in order to make a profit from changes in exchange rates

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

How can currency depreciation affect unemployment?

A
  • increases exports and AD, causing a fall in unemployment
  • cost-push inflation lowers GDP due to decreases AS in the short run, causing unemployment
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

How can cost push inflation affect economic growth?

A

real GDP falls due to decrease in the short run of AS (leftward shift)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is the value of real GDP affected by?

A

depends on whether the upward affect due to increased AD or the downward effect due to decreases short run AS is larger

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is FDI?

A

foreign direct investment - investment by multinational companies in productive facilities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What are remittances?

A

transfer of money from one country to another country - foreign workers sending money back to their home country

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What does increasing/decreasing currency demand lead to?

A

increasing currency demand - currency appreciation (D shifts to the right)
decreasing currency demand - currency depreciation (D shifts to the left)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What does increasing/decreasing currency supply lead to?

A

increasing currency supply - currency depreciation (S shifts to the right)
decreasing currency supply - currency appreciation (S shifts to the left)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is portfolio investment?

A

financial investments involving stocks, shares and bonds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What can lead to a decrease in currency demand?

A
  • decrease in foreign demand for exports of goods
  • higher inflation rates leading to decreased demand for foreign goods
  • low growth rates of trading partners
  • lower interest rates so less inward financial investment
  • decrease in flow of remittances
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What can lead to increase in currency demand?

A
  • increase in inward investment
  • increase in foreign demand of goods and services
  • lower inflation and high growth rates
  • high interest rates increases financial investment
  • increase in flow of remittances
  • speculation increases
  • central bank purchases domestic currency using reserves
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What can lead to an increase in currency supply?

A
  • increase in domestic demand for imports of goods and service
  • higher inflation leading to increased domestic demand
  • high domestic growth rate and speculation
  • lower interest rates leads to more financial investment abroad
  • central bank sells foreign currency to buy its own currency
  • increased outward investment and outflow of remittances
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What can lead to a decrease in currency supply?

A
  • decrease in outward investment and outflow of remittances
  • decrease in domestic demand for goods and services
  • lower inflation leading to lower demand for imports
  • low domestic growth
  • high interest rates means less financial investment abroad
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What is demand pull inflation?

A

prices are pulled higher due to shortages as aggregate demand increases but aggregate supply remains the same

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

How can exports lead to appreciation and depreciation?

A

appreciation - decrease in net exports (X-M)
depreciation - increase in net exports (X-M)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What is cost-push inflation?

A

when prices increase due to the rising costs of production

24
Q

What is the impact of currency appreciation/depreciation on demand-pull inflation?

A

appreciation - reduces demand-pull inflation due to decreases in net exports, so AD falls
depreciation - makes exports cheaper and imports expensive, so less exports causes the AD to shift to the right

25
Q

What may or may not cause demand-pull inflation?

A
  • if there is recession, increase in AD doesn’t cause inflation
  • if not in recession, excess AD causes inflation
26
Q

How can currency appreciation and depreciation cause cost-push inflation?

A

appreciation - makes imports cheaper, so the SRAS shifts right and lowers inflation
depreciation - makes imports expensive, so SRAS curve shifts to the left and increases costs of productions for firms who rely on foreign imports

27
Q

How can currency appreciation affect unemployment?

A
  • reduces net exports and AD, creating unemployment but imports increase
28
Q

How can currency depreciation/appreciation in exchange rates affect economic growth?

A

depreciation - increases net exports, AD and real GDP (short term) and increased investment spending and increased output (long term)
appreciation - reduces net exports and reduced growth of real GDP

29
Q

How can exchange rates affect current account balance?

A

depreciation - imports decrease and exports increase
appreciation - imports increase and exports decrease

30
Q

When is there a trade deficit or surplus?

A

deficit - imports > exports
surplus - exports > imports

31
Q

What is CAB?

A

current account balance

32
Q

How can exchange rates affect foreign debt?

A

depreciation - causes the value of foreign debt to increase
appreciation - causes the value of foreign debt to decrease

33
Q

What is a fixed exchange rate system?

A

exchange rates are fixed by a central bank of each country at a particular narrow level and aren’t permitted to change freely in response to changes of demand and supply
- requires constant government intervention

34
Q

How can exchange rates affect living standards?

A

depreciation - imported goods become more expensive and may increase prices due to shortages (demand-pull inflation) and higher costs of production (cost-push inflation), lowering living standards
appreciation - imported goods become cheaper, so can buy a larger quantity and increasing standards of living as more people are able to afford goods and services

35
Q

What is a managed exchange rate system?

A

exchange rates are determined by market forces of demand and supply with periodic government intervention to smooth out abrupt fluctuations

36
Q

What is overvalued currency?

A

currency that has a value too high relative to the equilibrium free market value

37
Q

What are the types of intervention that can be used to maintain fixed exchange rates?

A
  • using official reserves to maintain the exchange rate
  • increasing interest rates
  • borrowing from abroad
  • limiting imports
38
Q

What is devaluation?

A

if the value of the currency is higher than what can be maintained, the government would change it to a lower value

39
Q

What is revaluation?

A

if the value of the currency is lower than what can be maintained, the government would change it to a higher value

40
Q

What is pegging?

A
41
Q

What are the advantages and disadvantages of overvalued currency?

A

pros - cheaper imports, speeds up industrialisation
cons - exports expensive, current account deficit, job losses, low economic growth, firms cannot compete

42
Q

What are the advantages and disadvantages of undervalued currency?

A

pros - export driven growth and import substitution causes economic growth
cons - expensive imports and risk of retaliation

43
Q

What is undervalued currency?

A

currency that has a value too low relative to the equilibrium free market value

44
Q

What is the balance of payments?

A

record of all transactions between residents of the country and all other countries in a given period of time

45
Q

What are credits and debits?

A

credits - inflows of money into the country
debits - outflows of money out of the country

46
Q

What is a surplus or deficit?

A

surplus - credits > debits
deficit - debits > credits

47
Q

What is the capital account?

A

inflows - outflows of funds for capital transfers and transactions in non-produces, non-financial assets
- small compared to current and financial account

48
Q

What 6 things are included in the current account?

A
  1. balance of trade in goods
  2. balance of trade in services
  3. balance of trade in goods and services
  4. income flow (inflow-outflow)
  5. current transfers
  6. total balance on current account
49
Q

What is included in the financial account?

A
  • FDI
  • Portfolio investment
  • reserve assets
  • official borrowing
  • total balance on financial account
50
Q

What are errors and omissions?

A

it is difficult to accurately record every single transaction, so there may be slight errors and differences

51
Q

Why is there a zero balance?

A

there is equilibrium when demand meets supply

52
Q

What is zero balance?

A

deficits are matched by surpluses
credits are equal to debits

53
Q

Why are the current and financial account interdependent?

A

value of what is traded (current account) is offset by payments of assets (financial account)

54
Q

What is a current account surplus?

A

produces more than it consumes
- can sell excess

55
Q

What is a current account deficit?

A

consumer more than it produces
- buys surplus

economics (14 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions