Exam code: 0455 & 0987
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Define exchange rate.
An exchange rate is the price of one currency in terms of another, such as £1 = €1.18.
Why are exchange rates important for international trade and finance?
Exchange rates are important because they determine how much of a foreign currency you receive when you exchange your own currency, affecting trade, investment, tourism, and international finance.
True or False?
Currencies are traded like products on the foreign exchange market.
True.
International currencies are products that can be bought and sold on the foreign exchange market (forex).
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Define exchange rate.
An exchange rate is the price of one currency in terms of another, such as £1 = €1.18.
Why are exchange rates important for international trade and finance?
Exchange rates are important because they determine how much of a foreign currency you receive when you exchange your own currency, affecting trade, investment, tourism, and international finance.
True or False?
Currencies are traded like products on the foreign exchange market.
True.
International currencies are products that can be bought and sold on the foreign exchange market (forex).
What is the main reason importers need to buy foreign currencies?
Importers need to buy foreign currencies to pay for goods and services from other countries.
Define exchange rate intervention.
Exchange rate intervention is when a government or central bank buys or sells its own currency to influence the value of its exchange rate.
Why might currency traders (speculators) buy or sell foreign currencies?
Speculators buy and sell currencies to make a profit from changes in exchange rates.
Define floating exchange rate.
A floating exchange rate is determined by the forces of demand and supply in the foreign exchange market, without direct government or central bank control.
Define appreciation.
An appreciation occurs when the value of a currency rises compared to another currency in a floating exchange rate system.
Define depreciation.
A depreciation occurs when the value of a currency falls compared to another currency in a floating exchange rate system.
What is the equilibrium exchange rate?
The equilibrium exchange rate is the rate where the quantity of a currency demanded equals the quantity supplied, so the currency market is in balance.
If a country's rise, demand for its currency increases, causing its value to .
If a country's exports rise, demand for its currency increases, causing its value to appreciate.
Higher rates attract foreign savers and investors, increasing demand for the currency and causing it to .
Higher interest rates attract foreign savers and investors, increasing demand for the currency and causing it to appreciate.
How does speculation affect exchange rates?
If traders believe a currency will rise in value, they buy more of it, increasing demand and causing appreciation. If they expect it to fall, they sell the currency, increasing supply and causing depreciation.
The supply of a currency increases when citizens more foreign goods and services.
The supply of a currency increases when citizens import more foreign goods and services.
True or False?
A currency appreciates if the supply of that currency increases.
False.
If the supply of a currency increases, its value tends to depreciate, not appreciate.
Name two main sources of demand for a currency.
Two main sources of demand for a currency are foreigners buying the country's exports and tourists visiting the country.
When the demand for a currency increases or the supply decreases, the currency .
When the demand for a currency increases or the supply decreases, the currency appreciates.
What happens to the value of the US dollar when Europeans visit the USA?
When Europeans visit the USA, they demand more US dollars, which increases demand for the dollar and causes it to appreciate.
Speculators who expect a currency to in value will sell it, increasing its .
Speculators who expect a currency to fall in value will sell it, increasing its supply.
Define exchange rate appreciation.
Exchange rate appreciation is when a currency becomes stronger relative to other currencies, making exports more expensive and imports cheaper.
Define currency depreciation.
Currency depreciation is when a currency becomes weaker relative to other currencies, making exports cheaper and imports more expensive.
What happens to the price of imports for domestic consumers when the currency appreciates?
When the currency appreciates, imports become cheaper for domestic consumers.
How does currency depreciation affect domestic exporters?
Currency depreciation benefits domestic exporters because their goods become cheaper for foreign buyers, increasing demand.
If the currency (gets stronger), exports become more and imports become .
If the currency appreciates (gets stronger), exports become more expensive and imports become cheaper.
When a currency , imported goods become and inflation is likely to .
When a currency appreciates, imported goods become cheaper and inflation is likely to fall.
A weaker pound after Brexit meant became cheaper for foreign buyers, while imported goods became .
A weaker pound after Brexit meant exports became cheaper for foreign buyers, while imported goods became more expensive.
True or False?
A depreciation of the currency will likely cause inflation to fall.
False.
A depreciation of the currency will likely cause inflation to rise because imported goods become more expensive.
What was one macroeconomic effect of the UK pound’s depreciation after the 2016 Brexit vote?
One macroeconomic effect was that inflation rose in the UK, peaking at 3% in 2017, partly due to higher import costs.
How can a change in the exchange rate affect the current account deficit?
A currency appreciation may worsen the current account deficit as exports fall and imports rise, while depreciation may reduce the deficit by boosting exports and reducing imports.