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20 Cards in this Set
- Front
- Back
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Def of exchange rate |
This is the of value of one currency compared to another currency |
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How demand for a currency arises |
This comes from foreigners who intend to invest in a country or to buy exports |
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How does supply of a currency arises |
When the local citizens import goods from abroad, travel abroad or go for education |
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What's appreciation |
This is when the value of currency increases in terms of other currencies |
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What does a shift of demand to the right for appreciation |
Increase in export |
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What does a leftward **** of supply in appreciation mean |
Fall in demand for imports |
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Consequences of appreciation (4( |
1) exports become more expensive, 2) imports become cheap 3) demand for exports will fall while demand for imports will increase. This will lead to a fall in GDP, fall in output and as well unemployment |
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What's happens when PED of a currency is inelastic in appreciation |
1) this will lead to an increase in revenue which will motivate production, it will create more employment and lead to economic growth |
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What's depreciation |
This is the fall in the value of a currency in terms of another currency |
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What does a leftward **** in the demand in depreciation |
Fall in exports |
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What does a rightward **** on the supply curve for depreciation |
Increase for imports |
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Consequences due to depreciation (2) |
1) exports will be cheaper but imports will be more expensive 2) incraSe in AD. whixh will lead to economic growth, more production and output and employment |
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What happens when PED Is inelastic in depreciation |
1) more money will be leaving the country which will worsen BOP and cause deficit 2)it will discourage investment and production causing unemployment and slowing down economic growth |
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Name two types of exchange rate |
1) floating exchange rate 2) fixed exchange rate |
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What's free exchange trade |
This is determined by the factors of demand and supply. There is no government intervention and the exchange rate keeps fluctuating |
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Adv of floating exchange rate |
1) it's self controlling. Appreciation of exchange rate will make exports expensive and imports cheaper. This might harm the economy. However a a fall in demand for exports may cause a fall in demand for s country which will lead to depreciation. ( Id there is a problem with appreciation of will move to depreciation) 2) no reserves required, therefore no opportunity cost 3) there is no need for a foreign currency not reserves to maintained exchange rate. Therefore no cost involved in for eg administration |
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Disadvantages of floating exchange rate |
1) exchange rate keeps fluctuatinh and it's not stable and this can make propel lose confidnece in the country 2) it can distort planning 3) it may make a countrys good less competitive because it isn't stable and it doesn't show the real state of competitiveness |
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What's fixed exchange rate |
This is a true of exchange whixh is determined by the government at a fixed value and its not allowed to fluctuate |
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Adv of fixed exchange rate |
1)it's more stable. This builds up confidence, maintains a countrys competitiveness in the market 2) it promotes planning and it's facilitated as the country is more stable 3) maintain the country competitiveness becUzd Ethernet exports price is more stable |
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Disadv of fixed exchange rate |
1) requires government to keep enough reserved in the bank which has opportunity cost because the money could have been alternatively used 2) high administration cost to maintain exchange rate as there is a need to employ more people |
