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EXCHANGE RATESMK 26
EXCHANGE RATE
• The price at which one currency can be exchanged for another.
e.g. $1= EUR 0.84 (stronger)
• domestic• stable• foreign• weak• strong• convertible• common• national
• (ex)change dollars• convert dollars to Euros• buy/sell ~• ~ rises/falls• ~ floats• ~fluctuates
CURRENCY/CURRENCIES
Fixed Exchange Rate v. Floating Exchange Rate
• the exchange rate is set and maintained at same level by the government irrespective of the market forces
• The Bretton Woods Agreement (1944)
set/determine an exchange rate
maintain an exchange rate
• the exchange rate is allowed to fluctuate according to the market forces without the intervention of the central bank or the government
• 1970s inflation USA
an exchage rate fluctuates
Devaluation/Revaluation
• official changes in the price of a currency in a fixed exchange rate system.
• ____________is when the price of the currency is officially decreased in a fixed exchange rate system.
• _____________is the official increase in the price of the currency within a fixed exchange rate system.
devaluation
revaluation
Appreciation and Depreciation
• floating exchange rates are determined by the ___________and ____________of that currency in the international market.
• when the value of the currency goes up as compared to other currency it is known as _______________.
• when the value of currency falls as compared to other currency it is known as _______________.
• when the _______________for a currency rises its price goes up and it becomes costlier
depreciation
appreciation
demand supply
demand
EXCHANGE RATESIN INTERNATIONAL TRADE
• S• P• I• C• E• D
• STRONG• POUND• IMPORTS • CHEAP• EXPORTS • DEAR
VIDEO: http://www.bbc.co.uk/news/business-11722578
REARRANGE THE WORD ORDER.
1.makes / A stronger currency / a country's exports / more expensive and/ cheaper/ imports / in foreign markets.
• A stronger* currency makes a country's exports more expensive and imports cheaper in foreign markets.
* it appreciates
2.A weaker currency/ a country's/ makes/ exports/ and its imports/ cheaper /more expensive/ in foreign markets.
• A weaker* currency makes a country's exports cheaper and its imports more expensive in foreign markets.
* it depreciates
PURCHASING POWER PARITY
• the exchange rate adjusts so that an identical good in two different countries has the same price when expressed in the same currency
Additional reading: The Big Mac Index(http://www.investopedia.com/articles/forex/09/big-mac-index.asp)
READING MK, p.128• exchange rate (definition)• 1944: fixed exchange rates/pegging against gold-
gold convertibility• adjustments of currencies (devaluation or
revaluation) with IMF• floating exchange rates (1971 USA):
supply/demand • PPP • speculation• hedging against currency fluctuations:futures• government intervention in exchange rates
COMPREHENSION / VOCABULARY
EXCHANGE RATES
JEOPARDY
?
The price at which one currency can be exchanged for another.
?
A system in which the Federal Reserve could exchange gold for all the paper money.
?
It means to “fix” a value of one currency against something else, e.g. the dollar was “…-ed” against gold.
?
Exchange rates which are determined by supply and demand.
?
Decrease in the value of a fixed exchange rate.
?
Decrease in the value of a floating exchange rate.
?
The value of a currency will fall.
?
A person who trades currencies in the hope of making quick, large gains.
?
About 95 %.
?
An economic technique used to determine the relative values of two currencies, i.e. an identical good in two different countries has the same price when expressed in a different currency.
?
It means to protect oneself from currency fluctuations, for example by way of futures contracts.
?
By buying or selling their currency on the exchange markets.
?
Because the central bank wants to lower its value.
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