Untitled Deck Flashcards
(17 cards)
What is a fixed exchange rate?
When the value of a currency is fixed to the value of another currency.
Fixed exchange rates provide stability in international prices.
How can interest rates be managed in a fixed exchange rate system?
Through changes in interest rates and using foreign currency transactions.
This can influence the demand for the local currency.
What is revaluation in the context of exchange rates?
Increasing the exchange rate and using foreign currencies to purchase local currency, leading to appreciation.
Revaluation can strengthen a currency’s value.
What is devaluation in the context of exchange rates?
Lowering the interest rates and selling local currencies, leading to an increase in supply and depreciation.
Devaluation can weaken a currency’s value.
What is a managed exchange rate?
The government or central bank intervenes to keep the exchange rate within a certain range.
This approach combines elements of both fixed and floating exchange rates.
What is a floating exchange rate?
The government or central bank does not intervene, and the exchange rate is determined by supply and demand for domestic currency.
Floating exchange rates can lead to more volatility.
What are nominal exchange rates?
They tell us the price of one currency in terms of another.
Nominal rates do not account for inflation differences between countries.
What are real exchange rates?
Nominal exchange rate times domestic price level divided by foreign price level.
Real exchange rates reflect purchasing power differences.
How do low export prices influence international competitiveness?
They increase demand for a country’s exports, leading to a right shift of AD and increased competitiveness.
This can stimulate economic growth.
What are unit labour costs?
Total wage cost divided by total output, indicating the average spent on wages per unit of output.
Lower unit labour costs can make a country more competitive.
What is the global competitive index?
A measure that takes into account infrastructure, health, education, and technology to rank competitiveness.
It provides insights into a country’s overall economic environment.
How do exchange rates influence international competitiveness?
A depreciating exchange rate makes imports more expensive and exports cheaper, increasing competitiveness; an appreciating exchange rate does the opposite.
This is crucial for trade balance.
How do wage costs affect international competitiveness?
Increased wage costs raise production costs, shifting SRAS left and decreasing competitiveness; decreased wage costs lower production costs and shift SRAS right, increasing competitiveness.
Wage policies are essential in maintaining competitiveness.
What are non-wage costs?
Factors such as health and safety regulations, pensions, and taxes that impact production costs.
High non-wage costs can reduce international competitiveness.
What are supply side policies?
Government policies aimed at increasing aggregate supply in the economy.
These can lower price levels and make exports cheaper, boosting competitiveness.
Fill in the blank: An increase in aggregate supply will ______ price levels and make exports cheaper.
lower
This is essential for enhancing international competitiveness.
True or False: Removing supply side policies can improve a country’s international competitiveness.
False
Removing these policies can lead to reduced productivity and higher costs.
