6.3 Effects of Changes in Policies and Economic Conditions on the Foreign Exchange Market

• The forex market operates 24 hours a day, five days a week.


  True
• 1 USD is equivalent to 0.85 EUR according to the example exchange rate.


  True
• Match the supply and demand factors with their impact on exchange rates:

  Higher interest rates ↔️ Appreciation of currency

  Higher inflation rates ↔️ Depreciation of currency
• What happens to the USD if the US Federal Reserve increases interest rates?

  Appreciates against EUR
• What is the effect of expansionary fiscal policy on interest rates and currency value?

  Higher rates, appreciation
• Contractionary fiscal policy lowers aggregate demand and may decrease interest rates.

  True
• Higher interest rates in a country lead to currency appreciation.

  True
• The foreign exchange market operates 24 hours a day, five days a week.

  True
• What are the key factors influencing supply and demand in the forex market?

  Trade flows, interest rates, inflation, investor sentiment
• Which factor increases the supply of a country's currency in the forex market?

  Higher imports
• How do higher interest rates affect a country's currency value?

  Appreciates
• If the US increases interest rates, demand for USD rises, appreciating its value against EUR
• What is the effect of contractionary monetary policy on currency value?

  Appreciates
• Expansionary fiscal policy typically leads to higher aggregate demand and potentially higher interest rates
• Match the fiscal policy with its effect on currency value:

  Expansionary ↔️ Appreciates

  Contractionary ↔️ Depreciates
• Why do countries with higher inflation rates experience currency depreciation?

  Reduced demand for their currency
• If the US interest rates are higher than in Europe, foreign investors will move funds to the US, increasing demand for USD
• A trade surplus tends to appreciate the country's currency.
• Steps of government intervention in the foreign exchange market

  1️⃣ Direct currency purchases/sales

  2️⃣ Interest rate changes

  3️⃣ Capital controls
• What happens to a currency when a country has a trade surplus?

  The currency appreciates
• The foreign exchange market operates 24 hours a day, five days a week.


  True
• An example of an exchange rate is 1 USD = 0.85 EUR
• What is the effect of higher inflation on currency value?

  Depreciates currency
• If the US increases interest rates, the USD appreciates against the EUR.


  True
• What is the effect of contractionary fiscal policy on currency value?

  Depreciates currency
• Contractionary fiscal policy reduces aggregate demand, which in turn lowers interest rates.
• A high inflation rate in a country leads to a depreciation of its currency value.
• A low inflation rate in a country causes its currency to depreciate.

  False
• What is the primary goal of government intervention in the foreign exchange market?

  Stabilize exchange rates
• Raising interest rates by a central bank tends to depreciate the currency.

  False
• Order the events and their effects on exchange rates:

  1️⃣ Political Instability - Currency Depreciates

  2️⃣ Economic Recession - Currency Depreciates

  3️⃣ Interest Rate Hike - Currency Appreciates
• A trade surplus occurs when a country's exports exceed its imports.
• Match the trade balance with its effect on currency value:

  Trade Surplus ↔️ Appreciates Currency

  Trade Deficit ↔️ Depreciates Currency
• Direct currency purchases or sales by a central bank can influence exchange rates.
• An interest rate hike tends to depreciate a country's currency.

  False
• The value of one currency in terms of another is called the exchange
• To buy 100 EUR, you would need to spend 85 USD based on the given exchange rate.
• Expansionary monetary policy lowers interest rates, causing the currency to depreciate.
• Expansionary monetary policy lowers interest rates, leading to currency depreciation.
• How do fiscal policy changes affect exchange rates?

  By influencing demand and interest rates