2.6.4 Y2 Exchange rate systems

Exchange Rate

The value of one currency for the purpose of conversion to another.

Floating Exchange Rate

An exchange rate that is determined by the forces of demand and supply without direct government or central bank intervention.

Fixed Exchange Rate

A system where the government ties its currency's exchange rate to that of another currency to maintain stability.

Managed Exchange Rate

A system that combines aspects of both fixed and floating exchange rates; the government intervenes occasionally to stabilize currency.

Currency Union

A group of independent countries that share a single currency, leading to monetary policy integration.

Speculation

Investment that is based on the expectation of future price movements in the market.

Interest Rate Impact

Changes in interest rates can increase or decrease the demand for a currency, affecting its value in foreign exchange markets.

Inflation

The rate at which the general level of prices for goods and services rises, eroding purchasing power.

Benefits of Depreciation

A weaker currency may help improve a country's exports by making them cheaper for foreign buyers.

Macroeconomic Performance

Economic performance as measured by indicators such as GDP, unemployment, inflation, and trade balance.

Balance of Payments (BoP)

A record of all economic transactions between residents of a country and the rest of the world.

Foreign Direct Investment (FDI)

Investment made by a company or individual in one country in business interests in another country.

Hot Money

Capital that moves frequently in and out of financial markets and is seeking the highest short-term returns.

Eurozone

A geographical and economic region that consists of all the European Union countries that have adopted the euro as their official currency.

Transition Costs

Costs associated with transitioning to a new currency system or regime, including production and implementation expenses.

Price Stability

A condition in which prices in an economy do not fluctuate significantly in the short term.

Currency Conversion Costs

Costs incurred when exchanging one currency for another, which can be eliminated by using the same currency.

Economic Shock

An unexpected event that causes a significant change in the economy, which can impact monetary and fiscal policy.

Automatic Stabilizers

Economic policies and programs that automatically help stabilize an economy.

Depreciation of Currency

A decrease in the value of one currency relative to another, which can affect trade balances and economic activity.

Monetary Policy

The process by which the central bank manages the supply of money, often targeting an inflation rate or interest rate.

Currency Appreciation

An increase in the value of one currency relative to another, which can make exports more expensive and imports cheaper.

Trade Balance

The difference between a country's exports and imports of goods and services.

Exchange Rate Regimes

The various systems countries use to manage their currency's value relative to other currencies, such as fixed, floating, or managed.

Purchasing Power Parity (PPP)

An economic theory that states that in the long term, exchange rates should adjust so that identical goods cost the same in different countries.

Market Sentiment

The overall attitude of investors toward a particular security or financial market, which can influence currency values.

Bretton Woods System

An international monetary system established in 1944 that fixed exchange rates in relation to the US dollar, which was convertible to gold.

Cross-Border Investments

Investments made in one country by individuals or entities from another country.

Central Bank Intervention

Actions taken by a nation's central bank to influence the value of its currency in the foreign exchange market.

Monetary Union

A group of countries that share a common currency and have a unified monetary policy.

Overvaluation

A situation where a currency's value is higher than its fundamental value based on economic indicators.

Arbitrage

The simultaneous purchase and sale of an asset in different markets to profit from unequal prices.

Capital Flight

The rapid exit of financial assets and capital from a country, often due to political or economic instability.

Exchange Rate Risk

The potential for an investor's returns to be affected by fluctuations in exchange rates.

Pegged Exchange Rate

A type of fixed exchange rate where a currency's value is tied to another major currency.

Interest Rate Parity

A theory stating that differences in interest rates between countries are equalized by the forward exchange rates.

Currency Hedging

A risk management strategy used to offset potential losses in currency exchange rates.

Devaluation

A deliberate downward adjustment of a country's currency value relative to another currency.

Appreciation of Currency

An increase in the value of one currency compared to another currency, making imports cheaper.

Current Account

A component of a country's balance of payments that includes trade balance, net income, and direct payments.

External Debt

Borrowing by a country from foreign lenders, often for the purpose of financing development.