4.5.4 Exchange Rates

Cards (23)

  • What is an exchange rate?
    Price of one currency
  • When a currency depreciates, it gains value.
    False
  • How many primary exchange rate systems are there?
    Three
  • A floating exchange rate system is determined by supply and demand.

    True
  • How does higher GDP growth affect a country's currency value?
    Appreciation
  • Higher GDP growth increases demand for a country's currency, leading to its appreciation
  • What effect do higher interest rates have on a country's currency value?
    Appreciation
  • Order the likely sequence of events when a currency appreciates:
    1️⃣ Exports become more expensive
    2️⃣ Imports become cheaper
    3️⃣ Trade balance may worsen
  • What happens to exports when a currency appreciates?
    Become more expensive
  • Currency appreciation may worsen the trade balance because exports become less competitive.
    True
  • Governments may use direct intervention by buying or selling domestic currency on the open market
  • Exchange rates are primarily influenced by demand
  • Match the key concept with its effect on exports:
    Appreciation ↔️ Exports become more expensive
    Depreciation ↔️ Exports become cheaper
  • In a fixed exchange rate system, the currency value is set by the government or central bank
  • Match the system type with its advantage:
    Fixed Exchange Rate ↔️ Stability
    Floating Exchange Rate ↔️ Flexibility
    Managed Float ↔️ Combines stability and flexibility
  • Higher interest rates attract foreign investment
  • What is the primary factor that influences exchange rates?
    Currency value relative to others
  • Higher inflation reduces demand for a currency, leading to its depreciation.

    True
  • A trade surplus increases demand for a country's currency, leading to its appreciation
  • Currency depreciation may improve the trade balance by making exports cheaper.

    True
  • When a currency depreciates, exports become cheaper for foreign buyers
  • What is one primary purpose of government intervention in exchange rates?
    Stabilizing the currency
  • Match the government intervention method with its effect:
    Direct Intervention ↔️ Reduces volatility
    Interest Rate Adjustments ↔️ Lowers export prices