4.7.4 Exchange Rates and Trade

• What are exchange rates defined as?

  Rates of currency exchange
• Match the exchange rate system with its description:

  Fixed Exchange Rate ↔️ Currency value is pegged to another currency or commodity.

  Floating Exchange Rate ↔️ Currency value fluctuates based on market supply and demand.

  Managed Exchange Rate ↔️ Government intervenes to moderate exchange rate movements.
• A fixed exchange rate system reduces currency risk for trade
• What is a key disadvantage of a floating exchange rate system?

  Volatility
• Higher interest rates attract foreign investment
• A surplus in the current account balance exerts upward pressure on the currency value.


  True
• What happens to a currency's value when interest rates rise in a country?

  Currency appreciates
• What does a current account surplus indicate for a country's currency?

  Upward pressure
• Order the following factors based on their immediate effect on a currency's value:

  1️⃣ Relative interest rates

  2️⃣ Relative inflation rates

  3️⃣ Current account balance

  4️⃣ Economic growth
• Overall confidence in a currency's stability is known as market sentiment
• Currency depreciation enhances the competitiveness of exports by lowering their prices.

  True
• What is the effect of currency appreciation on imports?

  Makes imports cheaper
• Match the exchange rate system with its advantage:

  Fixed exchange rate ↔️ Reduces currency risk

  Floating exchange rate ↔️ Flexibility to economic changes

  Managed exchange rate ↔️ Helps control inflation
• What is the primary disadvantage of a managed exchange rate system?

  Costly to manage
• A managed exchange rate system balances stability and flexibility but can be costly to manage.

  True
• Match the exchange rate system with its description:

  Fixed Exchange Rate ↔️ Currency value is pegged to another currency or commodity

  Floating Exchange Rate ↔️ Currency value fluctuates based on market supply and demand

  Managed Exchange Rate ↔️ Government intervenes to moderate exchange rate movements
• A floating exchange rate system does not require large currency reserves
• Order the factors affecting exchange rates based on their primary effect on currency value:

  1️⃣ Relative Interest Rates: Higher rates lead to appreciation

  2️⃣ Relative Inflation Rates: Lower rates lead to appreciation

  3️⃣ Current Account Balance: Surpluses exert upward pressure

  4️⃣ Economic Growth: Strong growth leads to appreciation

  5️⃣ Political Stability: Stability strengthens the currency
• What does a current account surplus indicate about a country's export market?

  Strong export market
• Understanding factors affecting exchange rates is crucial for predicting currency movements.


  True
• What effect does currency depreciation have on a country's exports?

  Enhances competitiveness
• What is a key consequence of exchange rate fluctuations on international trade?

  Changes in competitiveness
• Exchange rates determine the cost of exports and imports for countries.


  True
• A managed exchange rate system balances stability and flexibility.


  True
• How do lower inflation rates affect a country's currency value?

  Appreciation
• Political stability in a country strengthens its currency
• Lower inflation rates make a country's exports more competitive
• Strong economic growth often leads to increased foreign investment, causing the currency to depreciate.

  False
• What effect does political stability have on a country's currency?

  Strengthens the currency
• What is the effect of currency appreciation on imports?

  Makes imports cheaper
• Match the exchange rate change with its effect on exports:

  Currency appreciation ↔️ Exports become more expensive

  Currency depreciation ↔️ Exports become more competitive
• Exchange rates determine the cost of exports and imports for countries
• A floating exchange rate requires large currency reserves to maintain stability.

  False
• A fixed exchange rate system reduces uncertainty for businesses
• What is the main advantage of a floating exchange rate system?

  Flexibility
• There are three main types of exchange rate systems
• What is a key advantage of a fixed exchange rate system?

  Stability
• What is a major disadvantage of a managed exchange rate system?

  Risk of intervention failure
• Lower inflation rates make a country's exports more competitive
• Overall confidence in a currency's stability is known as market sentiment