Exchange Rates and International Capital Flows

These flashcards cover key terminology and concepts related to exchange rates and international capital flows.

Exchange Rate

The price of one unit of a country’s currency in terms of another country’s currency.

Foreign Exchange Market

A market in which people use one currency to buy another.

Derived Demand

Demand for foreign currencies that comes directly from the demand for foreign goods and services or for foreign capital.

Supply of Foreign Currency

Provided by foreigners who want to buy the exports of a particular nation.

Factors Affecting Currency Demand

Changes in tastes for goods, income, real interest rates, inflation rates, and speculation.

Currency Appreciation

When a currency increases in value compared to another currency.

Currency Depreciation

When a currency decreases in value compared to another currency.

Equilibrium Exchange Rate

The exchange rate determined by the supply of and demand for a foreign currency.

Macroeconomic Effects of Exchange Rates

Exchange rates affect aggregate demand, trade, and can create banking issues.

Floating Exchange Rate

An exchange rate determined by market forces without direct government control.