Foreign exchange rates
9 flashcards to master Foreign exchange rates
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Define the term 'exchange rate'.
The exchange rate is the price of one currency expressed in terms of another currency.
Explain what is meant by a 'floating exchange rate'.
A floating exchange rate is a system where the value of a currency is determined by the forces of supply and demand in the foreign exchange market, with no government intervention. Fluctuations occur freely based on market dynamics, such as changes in interest rates or investor confidence.
What is a 'fixed exchange rate' system?
A fixed exchange rate is a system where a country's currency value is pegged to another currency or a basket of currencies at a specific rate. The government or central bank actively intervenes in the foreign exchange market to maintain this fixed rate.
Define 'appreciation' in the context of foreign exchange rates.
Appreciation occurs when the value of a currency increases relative to another currency in a floating exchange rate system. This means it takes less of that currency to buy the same amount of the other currency, making exports more expensive and imports cheaper.
Explain what is meant by 'depreciation' of a currency.
Depreciation is a decrease in the value of a currency relative to another currency in a floating exchange rate system. This means it takes more of that currency to buy the same amount of the other currency, making exports cheaper and imports more expensive.
What is 'devaluation' in the context of exchange rates?
Devaluation is a deliberate downward adjustment of a currency's value by a government in a fixed exchange rate system. A government might devalue its currency to improve its trade balance or boost economic growth.
Define the term 'revaluation' in the context of foreign exchange rates.
Revaluation is a deliberate increase in the value of a currency by a government in a fixed exchange rate system. It makes exports more expensive and imports cheaper and is usually undertaken to combat inflation.
Explain the function of the 'foreign exchange market'.
The foreign exchange market (forex) is a global decentralized marketplace where currencies are traded. Its primary function is to facilitate the exchange of currencies for international trade, investment, and speculation.
A country's currency depreciates. Analyze two likely impacts on its balance of trade.
A currency depreciation will likely lead to an increase in exports as they become cheaper for foreign buyers. Simultaneously, imports become more expensive, which should lead to a decrease in import volume, improving the balance of trade, all else being equal.
Key Questions: Foreign exchange rates
Define the term 'exchange rate'.
The exchange rate is the price of one currency expressed in terms of another currency.
Explain what is meant by a 'floating exchange rate'.
A floating exchange rate is a system where the value of a currency is determined by the forces of supply and demand in the foreign exchange market, with no government intervention. Fluctuations occur freely based on market dynamics, such as changes in interest rates or investor confidence.
What is a 'fixed exchange rate' system?
A fixed exchange rate is a system where a country's currency value is pegged to another currency or a basket of currencies at a specific rate. The government or central bank actively intervenes in the foreign exchange market to maintain this fixed rate.
Define 'appreciation' in the context of foreign exchange rates.
Appreciation occurs when the value of a currency increases relative to another currency in a floating exchange rate system. This means it takes less of that currency to buy the same amount of the other currency, making exports more expensive and imports cheaper.
Explain what is meant by 'depreciation' of a currency.
Depreciation is a decrease in the value of a currency relative to another currency in a floating exchange rate system. This means it takes more of that currency to buy the same amount of the other currency, making exports cheaper and imports more expensive.
About Foreign exchange rates (6.4)
These 9 flashcards cover everything you need to know about Foreign exchange rates for your Cambridge IGCSE Economics (0455) exam. Each card is designed based on the official syllabus requirements.
What You'll Learn
- 7 Definitions - Key terms and their precise meanings that examiners expect
- 1 Key Concepts - Core ideas and principles from the 0455 syllabus
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After mastering Foreign exchange rates, explore these related topics:
- 6.3 Free trade and protection - 10 flashcards
- 6.5 Balance of payments - 10 flashcards
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