chapter 16 - exchange rates

Question 1

what might be an issue of a negative balance of trade

Answer 1

1. easier to import, harder to export
2. UK runs on a trade deficit
3. a deficit on trade in goods was offset by a surplus on trade in services

Question 2

the foreign exchange market is determined by….

Answer 2

1. the demand for imports
2. the demand for our exports
3. changes in inflation
4. changes in interest rates
5. changes in fiscal policy
6. investment inward and outward FDI
7. protectionism
8. global trading patterns / economic cycles

Question 3

floating exchange rate

Answer 3

price determined only by demand and supply of the currency - no government intervention

Question 4

fixed or pegged exchange rate

Answer 4

the value of a currency fixed in relation to an anchor currency by a central bank - not allowed to fluctuate

Question 5

managed pr dirty floating exchange rate

Answer 5

rate influenced by government via central bank but determined by the market

Question 6

revaluation

Answer 6

the currency’s value is adjusted relative to a baseline, such as the price of gold, another currency or wage rates

Question 7

effective exchange rates

Answer 7

where the currency is compared to a weighted basket of major foreign currency

Question 8

two effective exchange rates

Answer 8

1. only currencies that account for at least one percent of UK trade
2. (AKA the broad rate ) includes all currencies that account for at least 0.5 % of UK trade