Exchange Rates
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| What is an exchange rate? | It is the value of one currency expressed in terms of another currency, e.g. 1 pound = $1.50.
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| Where are currencies exchanged? | On the Foreign Exchange Market.
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| Who trades currencies on the foreign exchange market? | Governments, central banks, private commercial banks, MNCs etc.
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| What is an exchange rate regime? | This is the way that a country manages its exchange rates.
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| There are three major types of exchange rate regime. What are these? | Fixed, Floating and Managed
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| What is a fixed exchange rate? | A Fixed exchange rate is an exchange rate system where a currency's value is matched (or pegged) to the value of another single currency, a basket of currencies or to another measurable value (Gold).
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| In a fixed exchange rate regime, who actually decides the value and then maintains it? | The government or the central bank.
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| If the value of the currency in a fixed exchange rate regime is raised, we say that this is a ________ or if it is lowered then we say it is a __________? | revaluation of the currency and devaluation of the currency.
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| How is a fixed exchange rate maintained? | This is done by the government on the foreign exchange market. They actually buy and sell their own currency.
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| How can a government buy up their own currency? What will the use? | They use previously amassed reserves of foreign currencies.
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| If, in a fixed exchange rate regime, the value of the currency is increase due to too much demand what can a governement do? | They would sell their own currency on the foreign exchange market which would result in an increase in their reserves of foreign currencies.
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| What is a floating exchange rate? | This is an exchange rate regime where the value of a currency is allowed to be determined solely by the demand for and supply of the currency on the foreign exchange market.
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| In a floating regime do governments intervene at all to control the exchange rate. | No, it is left totally up to the market.
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| How is the price of a currency decided upon in a floating system? | Through the interaction of supply and demand. The equilibrium point sets the price and quantity.
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| If the value of a currency in a floating exchange rate regime rises, we say that there has been a ____________ and if it falls we say there has been a ______________. What are the missing words here? | Appreciation and depreciation.
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| If the $ becomes stronger then we say that the purchasing power of the dollar has ___________. | Risen, which means that a given number of $s will buy more goods from the trading partner with the 'other' currency.
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| What would you expect to happen to the $ if lots of Australians wish to travel to Europe for their holidays. | The supply of the $ would increase as Australians buy Euros. As a result, the $ would depreciate and the Euro would appreciate.
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| What would you expect to happen to the $ if lots of Australians purchase imports from Europe. | The supply of the $ would increase as Australians buy Euros to pay for the imports. As a result, the $ would depreciate and the Euro would appreciate.
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| What would you expect to happen to the $ if lots of European firms invest in Australia (FDI or portfolio investment). | The demand of the $ would increase as firms in Europe purchase the currency to invest in Australia. As a result, the $ would appreciate and the Euro would depreciate.
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| What would you expect to happen to the $ if lots of Europeans save their money in Australian banks due to high interest rates. | The demand of the $ would increase as Europeans purchase the currency to save in Australian banks. As a result, the $ would appreciate and the Euro would depreciate.
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| What would you expect to happen to the $ if Australia is experiencing much lower inflation than its trading partners. The $ would appreciate as the demand for Australian exports increases (because they are cheaper) and foreigners need to purchase th |
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