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Flashcards in Exchange Rates Deck (30)
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1

Exchange rate

Price of one currency in terms of another

2

Why do we have exchange rates?

Necessary to convert currency when trading, countries can't use each other's currency

3

TWI

Determines changes in a currency's value against its main trading partners, weighted by percentage trade conducted with country

4

Forex market

Where currency is traded

5

Appreciation

Price increase in terms of another currency

6

What is the target exchange rate?

Stable,

7

Causes of depreciation

Decreased demand/increased supply of AUD

9

Causes of decreased demand for AUD

Decreased exports, income credits, capital inflow
Fall in ToT, interest rate differential
Higher relative inflation

10

Effect of depreciation

Decreased price of Aussie exports
Increased price of imports
Improved national competitiveness
Net exports increase → trade balance
Boost economic activity

11

Causes of increased supply of AUD

Increased imports, income debits, capital outflow
Fall in interest rate differential

12

Depreciation

Price of currency decreases in terms of another

13

World's most traded currency

USD

14

Why is it inaccurate to compare AUD with USD?

Not main trading partners

15

3 ways to determine exchange rate

Floating, managed, fixed

16

Fixed

Value tied to other currencies, central authority guarantees a certain exchange rate

17

Revaluation

Movement to a higher exchange rate for fixed

18

Devaluation

Movement to a lower exchange rate for fixed

19

Who is the central authority that might set the exchange rate?

Government, reserve bank

20

Managed exchange rate

Similar to free, allowed to find value within desired range, subject to intervention if outside said range

21

How would the currency be supported for a managed rate?

Central authority would buy the currency with foreign exchange

22

How would the currency be arrested for a managed rate?

Central authority would buy the foreign exchange with their own currency

23

Free/floating exchange

Price of currency determined by demand and supply

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Strongest currency

GBP

25

How is demand of a currency determined?

Credits: exports, received income, foreign investment, capital inflow

26

How is supply of a currency determined?

Debits: imports, paid income, overseas investment, capital outflow

27

Relative inflation rate

Increased international competitiveness, exports, demand for AUD
Decreased imports, supply of AUD

28

Movements in ToT (ceteris paribus)

Increased terms of trade, exports receipts, demand for AUD
Decreased import payments, supply of AUD

29

Effect of floating exchange rate (BoP)

Equalise value of debits/credits

30

How does floating exchange balance BOP?

Matching surplus, demand/credits = supply/debits

31

Quantitative easing

Creating more of a country's currency