XRs And XR Systems Flashcards
What is an XR
The rate at which one country’s currency can be exchanged for other currencies in the foreign exchange (FX) market
What is the effective XR
This is a weighted index of sterling’s value against a basket of currencies the weights are based on the importance of trade between the U.K. and each country
What is the largest economy in the world
USA
What happens as an XR changes
The value of amounts when they are converted also changes using the new XR
Ways XRs impact business activity
- price of exports
- cost of goods bought
- revenues and profits earned overseas
- converting cash receipts from customers overseas
Who wins from a lower XR
- businesses exporting into international markets
- businesses earning substantial profits in overseas currencies
Who loses from a lower XR
- businesses importing goods and services
- overseas businesses trying to compete in the domestic market
SPICED
Strong Pound Imports Cheaper Exports Dearer
What is a free floating currency
Where the external value of a currency depends wholly on market forces of supply and demand
What is a managed floating currency
When the central bank may choose to intervene in the foreign exchange markets to affect the value of a currency to meet specific macroeconomic objectives
What is a fixed XR system
E.g. a currency peg either as part of s currency board system of membership of the ERM II for countries intending to join the Euro
What sets the currency value in a freely floating XR
Set by market forces - the strength of currency supply and demand drives the external value of a currency in the markets
Features of a freely floating XR
No intervention by the central bank
There is no target for the XR
What type of exchange rate does the U.K. have
A floating XR
