Exchange Rates

Question 1

Exchange rates

Answer 1

Value of one currency expressed in terms of another currency

Question 2

Fixed exchange rate

Answer 2

When the exchange rate is fixed against the currency of another country

Question 3

Fluctuation band

Answer 3

A value that the currency must stay within. It is the responsibility of the central bank of the country to keep the exchange rate within the bands.

Question 4

If the exchange rate is getting too high…

Answer 4

The central bank sell (supplies) currency to reduce the upward presure

Question 5

If the exchange rate is getting too low…

Answer 5

The central bank buy (demand) currency, which reduces downward pressure

Question 6

Devaluation

Answer 6

When the central bank of a country reduces the value of their currency

Question 7

Revaluation

Answer 7

When the central bank of a country increases the value of their currency

Question 8

Floating exchange rate

Answer 8

When the value of a currency is determined by supply and demand for the currency

Question 9

Appreciation

Answer 9

When the value of one currency increases in value against another

Question 10

When does appreciation occur?

Answer 10

Increase in demand, a decrease in supply

Question 11

Depreciation

Answer 11

When the value of a currency decreases in value against another currency

Question 12

When does depreciation occur?

Answer 12

Decrease in demand, increase in supply

Question 13

Foreign demand for exports increase…

Answer 13

The demand increases (tastes and preferences, foreign incomes increase)

Question 14

Domestic demand for imports increase

Answer 14

Supply increases (tastes and preferences, domestic v foreign inflation)

Question 15

Foreign tourism in NZ decreases

Answer 15

Demand decreases, exchange rate depreciates

Question 16

Domestic tourism overseas decreases

Answer 16

Decreases supply, exchange rate appreciates

Question 17

What is foreign direct investment?

Answer 17

The purchase of assets of another country by a foreign individual/company etc

Question 18

What happens if a NZ company purchases assets in Aus?

Answer 18

Supply of NZD increases, exchange rate depreciates

Question 19

What happens if a foreigner purchases a NZ asset?

Answer 19

Demand NZ increases, exchange rate appreciates

Question 20

NZ resident purchases foreign shares - supply or demand of NZD

Answer 20

Supply

Question 21

NZ resident borrows money from overseas - supply or demand of NZD

Answer 21

Demanding

Question 22

NZ residents lend money overseas - supply or demand of NZD

Answer 22

Supplying

Question 23

Foreigner purchases NZ share - supply or demand of NZD

Answer 23

Demanding NZD

Question 24

Foreigner repays money previously borrowed from NZ - supply or demand of NZD

Answer 24

Demanding NZD

Question 25

Foreigner sells NZ shares - supply or demand of NZD

Answer 25

Supplying NZD

Question 26

NZ repays money previously borrowed from overseas - supply or demand of NZD

Answer 26

Supplying NZD

Question 27

How do relative interest rates affect the exchange rate?

Answer 27

If domestic interest rates are lower than foreign interest rates, NZ residents deposit money overseas and so increase supply of NZD so ER would decrease.

Question 28

How does speculation affect the exchange rate?

Answer 28

If people speculate about the value of a currency increasing, people will demand more of it.

Question 29

How can central banks intervene if they believe that the interest rate is too low or too high?

Answer 29

They can supply domestic currency from its reserve to depreciate the exchange rate (if its too high) or they can demand domestic currency using its reserves of foreign currencies to appreciate the exchange rate (if its too low)

Question 30

Managed exchange rates

Answer 30

An exchange rate that floats according to demand and supply changes, but at times the govt intervenes if the exchange rate is too high or too low

Question 31

Why does every country with a floating exchange rate really have a managed exchange rate?

Answer 31

Government will always intervene if required.

Question 32

What is the difference between a managed exchange rate and a fixed exchange rate?

Answer 32

A managed exchange rate has a much wider band.