Lecture 3: Exchange Rates

Flashcards focused on key terms and concepts related to foreign exchange and exchange rate systems.

FOREX

Foreign exchange market where currencies are traded.

Exchange Rate

The price of one currency in terms of another currency.

Appreciation

When the price of a currency becomes more valuable.

Depreciation

When the price of a currency becomes less valuable.

Floating Exchange Rates

Exchange rates that are determined by market forces without government intervention.

Fixed Exchange Rates

Exchange rates that are maintained at a certain level by government intervention.

Currency Crisis

A situation where there is a sudden devaluation of a country's currency.

Equilibrating Actions

The interactions of buyers and sellers that determine the price in the foreign exchange market.

Short Selling

A speculative technique where investors sell borrowed currency expecting to buy it back at a lower price.

Dollarization

The process of aligning a country's currency to the US dollar.

Trade-off in Currency Regimes

The balance between exchange rate stability and domestic economic autonomy.

Government Policy Choices

Decisions made by governments regarding floating or fixing exchange rates.

Zimbabwes Inflation Crisis

A historical example of extreme inflation related to poor currency management.

Speculative Pressures

Market forces that lead to currency crises through massive selling of a currency.

Fixed Exchange Rate Benefits

Increased trade and investment, lower risks associated with exchange rate fluctuations.

Floating Exchange Rate Benefits

Domestic monetary autonomy and the ability to adjust interest rates freely.