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14 Cards in this Set
- Front
- Back
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Nominal exchange rate |
The number of units of the domestic currency that can purchase a unit of a given foreign currency |
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Real exchange rate |
Exchange rate adjusted to receiver the different inflation rates in the countries of the two currencies concerned |
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Trade weighted index |
Used to test the level of a currency against a basket of currencies |
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Floating exchange rate |
A system where the price of one currency expressed in terms of another is determined by the forces of demand for, supply of the currency in the market |
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Fixed exchange rate |
A system where the value of one currency has a fixed value against others |
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4 ways a country fixes its exchange rate |
-buy its own currency on the market to increase demand for it and raise its value -sell its own currency to devaluate it - change interest rates- hot money -limit currency leaving the country |
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Managed exchange rate |
Free market forces of demand and supply are allowed to influence the exchange rate but the government intervenes if it goes too high or low |
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4 factors influencing supply of money |
-imports -saving abroad -speculation -QE |
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Appreciation |
Under a floating exchange rate the value of a currency increased against another currency as a result of the operation of market forces |
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Revaluation/ devaluation |
Occurs under fixed ex rate, government decides to increase the value of its currency and opposite |
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Competitive devaluation |
Currency wars because a devaluation/depreciation by one country results in other countries taking measures to reduce the value of their currency |
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2 benefits and 4 drawbacks of a managed exchange rate system |
-stability- increased investment etc -influence macro objectives, current account, unemployment ~lose control of monetary policy ~won’t self correct in recession ~uses up foreign reserves ~speculation |
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2 benefits and 2 drawbacks of a floating exchange system |
-monetary policy is free to use -exchange rate can find its natural value and self correct ~uncertainty of x and m prices ~at risk to external shocks eg Brexit |
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Impacts of a stronger pound on the 4 objectives |
-growth: exports more expensive imports cheaper, shift AD left -inflation: less cost push and demand pull -current account: worsening as SPICED -unemployment: derived demand for labour, fewer exports fewer jobs (Also reduces FDI) |
