Chapter 4: Exchange Rate Determination

These flashcards include key vocabulary and definitions related to exchange rate determination, including changes in currency values, influences on exchange rates, and trading strategies.

Depreciation

Decline in a currency’s value.

Appreciation

Increase in a currency’s value.

Equilibrium exchange rate

The exchange rate at which the quantity demanded equals the quantity supplied.

Demand for currency

Increases when the value of the currency decreases, leading to a downward sloping demand schedule.

Supply of currency

Increases when the value of the currency increases, leading to an upward sloping supply schedule.

Factors that influence exchange rates

Relative inflation rates, interest rates, income levels, government controls, and expectations.

Cross exchange rates

The exchange rate between two currencies calculated through a third currency, often the USD.

Speculation

The act of buying or selling currencies based on expected future movements, which may involve converting holdings in anticipation of currency appreciation or depreciation.

Carry Trade

A strategy that involves borrowing in a currency with low interest and investing in a currency with higher interest.

Monthly volatility

A measure of price fluctuations in the currency exchange market over a month.