Ch 49

Question 1

Exchange rate

Answer 1

Currency’s value in terms of its real purchasing piwer

Question 3

Trade weighted exchange rate

Answer 3

Price of one currency against a basket of currencies

Question 4

Fixed exchange rate

Answer 4

Exchange rate set by the central bank land maintained by it

Question 5

Devaluation

Answer 5

Decision by the government to lower the international price of the country currency

Question 6

Revaluation

Answer 6

A decision by the government to raise the international price of the country currency

Question 7

Managed system

Answer 7

Where exchange rate is influenced by state intervention

Question 8

The role of the government and issues of equality and equity

Answer 8

A devaluation is likely to benefit firms that export but may harm firms that import raw materials and capital goods and consumers who may now. Have to pay higher prices

Question 9

Marshall Lerner condition

Answer 9

The requirement that for a fall in exchange rate to be successful in reducing a current account deficit, the sum of price elasticities must be greater than 1

Question 10

J curve effect

Answer 10

A fall in exchange rate causing an increase in account deficit before it reduces it due to the time it takes demand to respond

Question 12

Why do revaluation and devaluations occur

Answer 12

Current exchange rate isn’t sustainable(results in surpluses and shortages in market)

Use as policy tool