Exchange Rates (Edexcel IGCSE Economics): Flashcards
Exam code: 4EC1
1/360Still learning
Know0
- FrontExchange Rates
Define exchange rate.
Was this flashcard helpful?
Cards in this collection (36)
Define exchange rate.
An exchange rate is the price of one currency in terms of another, e.g. £1 = €1.18.
Define floating exchange rate system.
A floating exchange rate system allows the forces of demand and supply to determine the rate of exchange of a currency.
Define speculation.
Speculation occurs when traders buy a currency expecting it to be worth more in the short to medium term, then sell it to realise a profit.
Define hot money.
Hot money is money that flows between countries in response to relative interest rates, seeking the highest return.
How does speculation that the pound will rise affect the demand for the pound?
Speculators buy the pound now, expecting to sell it later at a profit, which increases the demand for the pound.
Who selects the exchange rate system a country uses?
The Central Bank of a country chooses the exchange rate system used to determine the value of its currency.
How does a rise in UK interest rates affect the demand for the pound?
A rise in UK interest rates increases the demand for the pound, as foreign investors move hot money into the UK for higher returns.
What happens to the supply of pounds when UK demand for imports rises?
The supply of pounds increases, as domestic consumers exchange pounds for foreign currency to pay for imports, causing the pound to depreciate.
True or False?
An increase in the demand for a currency raises its exchange rate.
True.
Increased demand for a currency on the foreign exchange market raises its price, or exchange rate.
True or False?
When UK investors sell pounds to buy foreign currency, the supply of pounds falls.
False.
Selling pounds to buy foreign currency increases the supply of pounds, causing the pound to depreciate.
Increased of a currency to the foreign exchange market will decrease its price.
Increased supply of a currency to the foreign exchange market will decrease its price.
A rise in the demand for UK exports increases the demand for the on the foreign exchange market.
A rise in the demand for UK exports increases the demand for the pound on the foreign exchange market.
Define appreciation.
Appreciation is a rise in a currency's value under a floating exchange rate system, caused by the demand for and supply of the currency.
Define revaluation.
Revaluation is a deliberate rise in a currency's value under a fixed exchange rate system.
Define a strengthening exchange rate.
A strengthening exchange rate is another term for an appreciating exchange rate, where the currency becomes worth more.
How does an appreciation of the US dollar affect US imports of European olive oil and the US current account?
A stronger dollar makes European olive oil cheaper, so US imports rise and the US current account worsens.
What happens to a currency's price when there is excess demand for it on FOREX?
When there is excess demand for a currency on FOREX, its price rises and the currency appreciates.
Besides a rise in demand, what change can also cause a currency to appreciate?
A decrease in the supply of the currency can also cause it to appreciate.
How does an appreciation affect the price of exports for foreign buyers?
An appreciation makes exports more expensive for foreign buyers, potentially decreasing export volumes.
What is the overall effect of an appreciation on the current account?
An appreciation worsens the current account balance, as export volumes fall and import volumes rise.
True or False?
Currencies can be bought and sold on the foreign exchange market just like any other product.
True.
Currencies are traded on the FOREX market like any other product, with their price set by demand and supply.
True or False?
A stronger exchange rate makes imports more expensive for domestic consumers.
False.
A stronger exchange rate makes imports cheaper for domestic consumers, which may raise import volumes.
When European tourists demand US dollars, the dollar's demand curve shifts to the , causing an appreciation.
When European tourists demand US dollars, the dollar's demand curve shifts to the right, causing an appreciation.
After an appreciation, foreign buyers must exchange of their own currency to buy a country's exports.
After an appreciation, foreign buyers must exchange more of their own currency to buy a country's exports.
Define depreciation.
Depreciation is a fall in a currency's value under a floating exchange rate system, caused by the demand for and supply of the currency.
Define devaluation.
Devaluation is a deliberate fall in a currency's value under a fixed exchange rate system.
Define a weaker exchange rate.
A weaker exchange rate is a depreciating exchange rate, where the currency becomes worth less and is cheaper to buy.
In which exchange rate system does depreciation occur?
Depreciation occurs in a floating exchange rate system.
How can European tourists visiting the USA cause the euro to depreciate?
They supply euros onto the FOREX market to buy US dollars, increasing the supply of euros, so the euro depreciates.
What change in demand for a currency can cause a depreciation?
A decrease in demand for the currency can cause a depreciation.
How does a depreciation affect the price of exports for foreign buyers?
A depreciation makes exports relatively cheaper for foreign buyers, potentially increasing export volumes.
What is the overall effect of a depreciation on the current account?
A depreciation improves the current account balance, as export volumes rise and import volumes fall.
True or False?
If the Thai baht depreciates against the yen, Thai exports to Japan become cheaper and their volume may rise.
True.
A weaker baht makes Thai exports cheaper for Japanese buyers, so the volume of exports may rise.
True or False?
A weaker exchange rate makes exports more expensive for foreign buyers.
False.
A weaker exchange rate makes exports cheaper for foreign buyers, which may raise export volumes.
A weaker currency can raise in export-related industries as cheaper exports become more competitive.
A weaker currency can raise employment in export-related industries as cheaper exports become more competitive.
On a currency diagram, a depreciation is shown by the currency's supply curve shifting to the .
On a currency diagram, a depreciation is shown by the currency's supply curve shifting to the right.
Sign up to unlock flashcards
or