4.5.4 Exchange Rates

• Match the exchange rate system with its description:

  Fixed Exchange Rate ↔️ Currency value is set by the government

  Floating Exchange Rate ↔️ Currency value is determined by market forces
• Higher demand for a currency appreciates
• Higher interest rates attract foreign investment, increasing the currency's value
• What forces determine currency values in foreign exchange markets?

  Demand and supply
• What does appreciation of a currency make exports more expensive and imports cheaper?

  Increase in currency value
• What do exchange rates specify?

  Currency value in terms of another
• Exchange rates are vital to monetary policy because they influence international trade and capital flows.


  True
• How does higher inflation affect a currency's value?

  Depreciates it
• A positive balance of payments improves a currency's value.

  True
• Demand for a currency arises from exports and foreign investment
• Depreciation of a currency makes exports cheaper and imports more expensive.


  True
• Fixed exchange rates are determined by market forces of supply and demand.

  False
• Exchange rates are vital to monetary policy because they influence international trade and capital flows.

  True
• Order the steps of how government policies can affect exchange rates:

  1️⃣ Government intervenes in the market

  2️⃣ Policy changes are implemented

  3️⃣ Currency value stabilizes or manipulates
• In the foreign exchange markets, currency values are determined by the forces of demand and supply
• The balance between exports and imports is known as the trade balance
• Appreciation makes exports more expensive
• Match the economic effect of exchange rate changes with its impact:

  Depreciation ↔️ Increases inflation

  Appreciation ↔️ Reduces net exports

  Capital inflows ↔️ Appreciates currency
• Order the effects of depreciation on tourism:

  1️⃣ Country becomes more affordable

  2️⃣ Tourists are attracted

  3️⃣ Tourism revenue increases
• Exchange rates specify the value of one currency
• Floating exchange rates are determined by market forces of supply and demand
• Higher inflation rates in a country can depreciate its currency value.

  True
• Higher foreign investment inflows boost demand for domestic currency.


  True
• Appreciation refers to an increase in a currency's value
• Depreciation makes imports cheaper.

  False
• Appreciation reduces business competitiveness by lowering revenue and investment.

  True
• The effects of exchange rate changes depend on the economy's trade openness