Exchange Rates: The Basics

These flashcards cover the basic concepts related to exchange rates, currency valuation, and economic implications based on the lecture notes.

What is a nominal exchange rate?

The price of one currency in terms of another currency.

When does currency appreciate?

When it becomes stronger compared to another currency.

What is the effect of a fixed exchange rate?

It is determined through government intervention in the exchange markets.

Describe Argentina's currency peg in the 1990s.

It was a fixed exchange rate set at 1 peso per dollar to control hyperinflation.

What do foreign reserves refer to?

A central bank's holding of foreign currencies for government international transactions.

What happens during a balance of payments (BOP) crisis?

A government is unable or unwilling to meet its international financial obligations.

What is Purchasing Power Parity (PPP)?

A statement about how real exchange rates behave over time, suggesting that in the long run, a basket of goods should cost the same in two different countries.

What are the key results of maintaining a fixed exchange rate?

Domestic nominal interest rates match foreign rates; seignorage revenue is zero.

What occurs during a currency run?

Holders of a currency try to switch into a more stable currency before depreciation.

What characterizes the pre-collapse phase of a fixed exchange rate system?

Persistent fiscal deficits and low inflation, with declining foreign reserves.

What can lead to a devaluation of the domestic currency?

Imminent BOP crisis caused by running out of foreign reserves.