Exchange Rates Flashcards
(21 cards)
What is the exchange rate
How much one currency costs in terms of another
Exchange rate R
of foreign currency per unit of domestic currency
Exchange rate 1/R
of domestic currency per unit of foreign currency
If R increases, the currency is said to have
Appreciated
If R decreases, the currency is said to have
Depreciated
As R depreciates against a foreign country, each unit of domestic currency trades for ____ units of foreign currency
Fewer
As a domestic currency depreciates, it takes _____ of it to pay for international goods
More
As a domestic currency depreciates, it takes _____ foreign currency it to export domestic goods
Fewer
As R decreases, exports _____ and imports ______
Increase; decrease
As R increases, exports _____ and imports ____
Decrease, increase
If interest rates are higher domestically, (capital…)
Capital inflows
Residents sell real and financial assets to residents of the rest of the world
If interest rates are lower domestically, (capital…)
Capital outflows
Residents buy real and financial assets from residents in the rest of the world
Net exports are _____ related to income domestically
Negatively/inversely
Net exports are ______ related to income in the rest of the world (foreign income levels)
Positively
Net exports are ____ related to R
Negatively/inversely
Income side includes (2)
Exports and capital inflows
Payment side includes (2)
Imports and capital outflows)
On the income side (exports and capital inflows), what happens to domestic currency
Demand increases
Foreign currency is sold for domestic
(Supply decreases?)
On the payment side (imports and capital outflows), what happens to domestic currency?
Supply of domestic currency increases, because of selling it and buying foreign currency from market
2 reasons a moneys demand curve shifts to the right
Higher foreign income (greater demand for exports, greater demand domestic currency at all Rs)
Higher domestic interest rate (capital inflows, greater demand for domestic currency)
2 reasons a moneys supply curve shifts to the right
Higher domestic income (greater demand for imports, greater supply of all domestic currency for all Rs)
Lower domestic interest rate (creates capital outflows, greater supply for domestic currency)
