5. Exchange Rates Flashcards
(10 cards)
What is an exchange rate?
The price of one currency in terms of another currency.
Define a floating exchange rate system.
A system where the value of a currency is determined by market forces without direct government or central bank intervention.
What is a fixed exchange rate system?
A system where a country’s currency value is tied to another major currency or a basket of currencies.
Explain currency appreciation.
An increase in the value of a currency relative to another currency in a floating exchange rate system.
What is currency depreciation?
A decrease in the value of a currency relative to another currency in a floating exchange rate system.
How can central banks influence exchange rates?
Through interventions such as buying or selling currencies, adjusting interest rates, and implementing monetary policies.
What factors can lead to changes in exchange rates?
Interest rate differentials, inflation rates, political stability, economic performance, and market speculation.
Define a managed float exchange rate system.
A system where exchange rates primarily fluctuate based on market forces but with occasional government or central bank intervention to stabilize or steer the currency value.
What is a currency peg?
A policy where a country maintains its currency’s value at a fixed exchange rate to another currency.
How do exchange rates impact international trade?
Fluctuations in exchange rates can affect the competitiveness of exports and imports, influencing trade balances and economic relationships between countries.
