Ch 26 - Exchange Rates
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19 Terms
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exchange rate
Fixed ________: value of a currency is fixed to the value of another country.
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Fixed exchange rate
value of a currency is fixed to the value of another country
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Floating exchange rate
the exchange rate between two currencies is the price of one in terms of the other
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Monetary exchange rate
the government usually sets a range between which the exchange rate should remain
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Appreciation
increase in the value of the exchange rate in comparison to other currencies operating within a floating rate system
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Depreciation
decrease in the value of the exchange rate in comparison to other currencies operating in a floating exchange
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→ Overvaluation
imports are cheaper in local currency
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→ Undervaluation
when a currencys value in foreign exchange is low
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**Fixed exchange rate**
value of a currency is fixed to the value of another country
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**Floating exchange rate**
the exchange rate between two currencies is the price of one in terms of the other
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**Monetary exchange rate**
the government usually sets a range between which the exchange rate should remain. It is the currency in which value and exchange rates are influenced by intervention from a central bank
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**Appreciation**
increase in the value of the exchange rate in comparison to other currencies operating within a floating rate system
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**Depreciation**
decrease in the value of the exchange rate in comparison to other currencies operating in a floating exchange
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**Overvaluation**
A company is considered overvalued if it trades at a rate that is unjustifiably and significantly in excess of its peers
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**Balance of payments**
the current account balance tends to worsen when the currency appreciates because exports become more expensive in comparison to imports.
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**Undervaluation**
a security or other type of investment that is selling in the market for a price presumed to be below the investment's true intrinsic value.
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**Employment**
unemployment may increase as a result of appreciation because this would increase the relative price for exports and therefore reduce the demand for exports.
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I**nflation**
if the currency appreciates and this results in unemployment, then consumption would likely decrease.
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**Economic growth**
as a result of falling exports and higher unemployment, appreciation is likely to lead to lower rates of economic growth in the long run.
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