4.6.4 Exchange rates

• There are two primary types of exchange rate systems: fixed and floating.


  True
• A fixed exchange rate provides certainty for trade and investment but limits monetary policy autonomy
• Economic growth, inflation, interest rates, and balance of payments can all influence exchange rates.


  True
• What effect does higher inflation have on a country's currency value in a floating exchange rate system?

  It falls
• A country with a trade deficit will typically see its currency fall
• In a floating exchange rate system, the currency's value is determined by supply and demand
• Stronger economic growth in a country tends to increase the demand for its currency, causing the exchange rate to rise.


  True
• What happens to a country's currency value if it has a trade deficit?

  It falls
• The supply and demand of currencies in the foreign exchange market determines exchange rates in a floating exchange rate system.
• In a fixed exchange rate system, the government must intervene in the foreign exchange market to maintain the set exchange rate.


  True
• What happens to imports during a currency depreciation?

  Become more expensive
• What is the definition of exchange rates?

  Price of one currency in terms of another
• What is a major disadvantage of a fixed exchange rate system?

  Limits monetary policy autonomy
• Higher inflation in a country makes its goods and services less competitive.
• Higher inflation in a country makes its goods and services more competitive internationally.

  False
• What is the effect of a trade deficit on a country's floating exchange rate?

  Exchange rate falls
• The supply and demand of currencies in the foreign exchange market determine exchange rates in a floating exchange rate system
• When the supply of a currency increases in a floating system, the exchange rate falls
• A weaker domestic currency makes imports more expensive and exports cheaper.


  True
• What happens to import volumes when a currency depreciates?

  Decreases
• Match the effect of currency depreciation with its trade impact:

  Imports ↔️ More expensive

  Exports ↔️ Cheaper

  Trade Balance ↔️ Improves
• A floating exchange rate system allows for flexibility in monetary policy.

  True
• What must the government do in a fixed exchange rate system to maintain the set rate?

  Intervene in the market
• Exchange rates are the price of one country's currency in terms of another
• Match the exchange rate system with its definition:

  Fixed Exchange Rate ↔️ Currency value set by government

  Floating Exchange Rate ↔️ Currency value determined by market supply and demand
• Which country uses a fixed exchange rate system pegged to the USD?

  Saudi Arabia
• Stronger economic growth in a country tends to increase demand for its currency, causing the exchange rate to rise
• Higher interest rates in a country make its currency more attractive to investors, causing the exchange rate to rise.

  True
• Who sets and maintains the value of a currency in a fixed exchange rate system?

  Government or central bank
• What effect does higher inflation in a country have on its currency value?

  It falls
• Higher interest rates in a country make its currency more attractive to investors
• In a fixed exchange rate system, the government must actively manage the exchange rate to maintain its set level.


  True
• What action must a government take if there is increased demand for its currency in a fixed exchange rate system?

  Buy currency
• A currency depreciation makes imports more expensive and exports cheaper.
• In a floating exchange rate system, the market directly determines currency value.

  True
• Match the exchange rate system with its characteristic:

  Fixed Exchange Rate ↔️ Maintained by government

  Floating Exchange Rate ↔️ Determined by supply and demand
• A floating exchange rate system adjusts automatically to changing economic conditions.

  True
• How does stronger economic growth in a country affect its floating exchange rate?

  Exchange rate rises
• Higher interest rates in a country make its currency more attractive to investors
• In a fixed exchange rate system, the government or central bank must actively manage the exchange rate to maintain the set level.


  True