4.1.8 Exchange rates

Question 1

What are exchange rates

Answer 1

The price of one currency in terms of another

Question 2

What is a floating exchange rate

Answer 2

when exchange rates are determined by the demand and supply of currencies on the FOREX market

Question 3

What is a fixed exchange rate

Answer 3

The gov or central bank pegs their currency to the value of another currency, may be fully fixed or allowed to fluctuate between a target band

Question 4

Managed exchange rate

Answer 4

Monetary authorities control the exchange rate through buying and selling of the countries currency and through changes in interest rates

Question 5

What is an exchange rate index

Answer 5

Measures the performance of a currency against a group of other currencies, usually trade weighted (dependent on how significant other currencies are)

Question 6

What are the advantages of currency intervention

Answer 6

Avoids risk of currency fluctuations which can dramatically damage competitiveness
Fixed stable rate may encourage investment
Depreciation is inflationary
Appreciation can worsen the trade balance

Question 7

What are the disadvantages of currency intervention

Answer 7

Costly as buying sterling will use up the central banks reserve
Other more effective ways e.g through interest rates
Temporary shocks that exchange rate cant adjust to
Joining t the wrong rate if too high damages competitiveness but if too low will be inflationary
Black Wednesday