3.2. Exchange Rates
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12 Terms
Exchange Rate
The cost of one currency in terms of another currency.
Freely Floating Exchange Rate System
A system in which the value of a currency is determined by the supply of and demand for the currency in a free market.
Appreciation
An increase in the value of a currency in a freely floating exchange rate system.
Depreciation
A decrease in the value of a currency in a freely floating exchange rate system.
Fixed Exchange Rate System
A system in which the value of a currency is pegged to the value of another currency, the average value of a selection of other currencies, or the value of a commodity, such as gold.
Devaluation
A decrease in the pegged value of the currency in a fixed exchange rate system.
Revaluation
An increase in the pegged value of the currency in a fixed exchange rate system.
Managed Exchange Rate System
A system in which there is periodic central bank intervention to manipulate the value of a currency.
A depreciation/devaluation of the exchange rate has what effect on AD? Why?
Shifts AD right, as exports become cheaper and imports more expensive, so net exports increase.
An appreciation/revaluation of the exchange rate has what effect on AD? Why?
Shifts AD left, as exports become more expensive and imports cheaper, so net exports decrease.
A depreciation/devaluation of the exchange rate has what effect on SRAS? Why?
Shifts SRAS left, as costs of imported factors of production increase.
An appreciation/revaluation of the exchange rate has what effect on SRAS? Why?
Shifts SRAS right, costs of imported factors of production decrease.