Ch41-42 Exchange rates

• Exchange rate definition

  Price of a currency in terms of another currency
• Appreciation definition

  The value of a currency rises because of market forces - exchange rate rise
• Depreciation definition

  The value of a currency falls because of market forces - exchange rate falls
• revaluation definition

  Increase in exchange rate because of government intervention
• Devaluation definition

  a decrease in exchange rate because of government intervention
• Factors affecting supply and demand of currencies

  • Interest rate
  • export and import of goods and services
  • Currency speculator
  • FDI
• Why interest rate would affect the demand of a currency (in uk bank)


  • Higher interest rate in foreign banks
  • Put savings in uk bank where interest rates are higher
  • Sell domestic currency and buy foreign currency (uk)
  • Increase demand of pounds
  • Increase exchange rate
• Speculator definition

  Firms, individuals or financial institutions that buy and sell currencies hoping to make a profit
• Why currency speculators affect the demand of a currency 


  • Expect a currency will rise
  • Buy more of that currency then sell in the future
  • increase demand for currency
  • increase exchange rate
• Why demand for exports can affect the demand of a currency

  • sell domestic goods and services to foreigners
  • people have to buy your domestic currency
  • increase demand for currency
  • increase exchange rate
• Why inward FDI can affect the demand of a currency

  • increase demand for pounds
  • increase exchange rate