1.8 Exchange Rates Flashcards
(15 cards)
What is a floating exchange rate?
External currency value depends entirely on market forces
What is a managed exchange rate?
External value is affected by market forces but central bank can intervene
What is a fixed exchange rate?
Central bank has full control with no effect from market forces
- Need for FX reserves
What is an exchange rate?
Cost of one country’s currency in terms of another currency
What is a depreciation?
Fall in currency value in a floating system
What is devaluation?
Fall in currency value in a fixed system
Examples of floating systems?
1) UK
2) USA
Examples of managed systems?
1) Romania
2) China
Examples of fixed systems?
1) Denmark
2) Hong Kong
Causes of changes in floating systems?
1) FDI
2) Trade balances
3) Interest rates (“hot money”)
Main managed system policy tools?
1) Interest rates
2) Quantitative Easing/ Tightening
3) Buying/ selling FX reserves
What is “dirty floating”?
When a government deliberately devalues their currency to lift aggregate demand
How do exchange rates impact business activity?
1) Price of exports
2) Costs of imports
3) Revenues from overseas
Evaluating floating systems?
- Reduces need for FX reserves
- Efficiency
- Risk of volatility
- J-Curve
Evaluating fixed systems?
- Certainty = confidence
- Control inflation
- Reduced freedom of int. rates
- Need for FX reserves
