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Flashcards in Exchange rate Deck (12)
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1

Nominal exchange rate

the price of one currency in terms of another currency

2

Trade-weighted exchange rate

the price of one currency against a basket of currencies

3

Real exchange rate

a currency's value in terms of its real purchasing power

4

Floating exchange rate

An exchange rate that is determined by the market forces of demand and supply

5

Fixed exchange rate

An exchange rate set by the government and maintained by the central bank

6

Managed float exchange rate

An exchange rate that is both determined by the market forces of demand and supply and the government

7

Depreciation

The decrease in the international price of a currency caused by market forces

8

Devaluation

A decision by the government to lower the international price of the currency

A fall in the value of a fixed exchange rate

9

Advantages of floating exchange rate

1. BoP self-correcting.
2. No government intervention is needed
3. Greater flexibility
(flexibility to change policy by lower or higher interest rates without conflicting GEOs)

10

Disadvantages of floating exchange rate

1. exchange rate volatility
2. depreciation = cost-push inflation
3. appreciation = demand-pull inflation

11

Advantages of fixed exchange rate

1. encourage stability
2. reduces inflationary pressure if fixed against main trade partners

12

Disadvantages of fixed exchange rate

1. large foreign reserves are needed to maintain the fixed exchange rate (opportunity cost)
2. targeting the exchange rate may conflict with other GEOs (cannot change interest rates)
3. less flexibility, BoP not self-correcting