4.1.8 Echange Rates ✅

Question 1

What are the different rate systems?

Answer 1

• Floating.
• Fixed.
• Managed.

Question 2

Explain the floating exchange system?

Answer 2

• Exchange rate is determined by supply and demand in the foreign exchange market.
• Gov/bank does intervene/fluctuates freely.

Question 3

Explain the fixed exchange rate?

Answer 3

• Gov/bank sets specific rate it is committed to maintaining.
• Will buy or sell currency to maintain it.

Question 4

Explain a managed exchange rate?

Answer 4

• Hybrid approach when authorities occasionally intervene.
• Flexibility + degree of stability.

Question 5

What are exchange rates?

Answer 5

Purchasing power of a currency in terms of what it can buy of other.

Question 6

What is the distinction between a Revaluation and appreciation of a currency?

Answer 6

Revaluation = increase in official exchange rate set by gov/bank. It is deliberate policy to strengthen the value.
Appreciation = natural increase in currency value due to market forces eg increase in D for currency.

Question 7

What is the distinction between devaluation and depreciation?

Answer 7

Devaluation = deliberate policy by gov/bank to reduce official exchange rate to make exports cheaper/imports more.
Depreciation = currency’s value decreases in foreign exchange market.

Question 8

What are the factors that effect a floating exchange rate?

Answer 8

• Intrest rates = higher attract forign capital/ increase demand for currency.
• Econ data = GDP/inflation affect currency demand.
• Speculation = traders move money.
• political stability = effect investor confidence.

Question 9

What are ways gov can influence the exchange rate?

Answer 9

• Intrest rates.
• Use forign currency reserves

Question 10

How can the gov use forign currency reserves to manipulate the exchange rate? Show graphs? What it an evaluation of this method?

Answer 10

Appreciate it = increase demand by selling their forign currency for pounds.
Depreciate it increasing supply of currency through buying forign currency or gold.

Has no long-term impact.

Question 11

What is the consequence of competitive devlautio/depreciation?

Answer 11

Countries deliberately intervene in forign exchange market to drive down value/increase competitiveness.
- Other countries may follow or implement protectionism/disrupt world trade.

Question 12

Impact of exchange rate changes to the current acc of BOP?

Answer 12

• Marshall Lerner = depreciation only improve trade balence if sum of PED is elastic.
• Jcurve effect = ST depreciation may initially worsen the trade balence before improving it.

Question 13

Impact of changes in the exchange rate on econ growht/employment?

Answer 13

• Weaker currency can boost exports stimulating econ growht/reducing unemployment.

Question 14

What is the impact of change in exchange rate on inflation?

Answer 14

• Depreciating currency can lead to higher import prices adding to inflation (SRAS shift back to higher costs).
• net exports in ad will rise.

Question 15

What is the impact of a change in the exchange rate on FDI flows?

Answer 15

• effects attractiveness as weaker country make buying assets more appealing to forign investors eg lower costs in buying buildings.