4.1.8 - exchange rates

define exchange rate

the price of one currency in terms of another

international currencies are….

…products that can be bought and sold on the foreign exchange market (forex)

who chooses the exchange rate system used

the central bank

what are the three exchange rate systems

floating exchange rate

fixed exchange rate

managed exchange rate

define floating exchange rate

demand and supply determines the rate at which one currency exchanges for another

how does a floating exchange rate go up or down

excess demand for the currency = currency WORTH MORE (appreciation)

and vice versa

define a fixed exchange rate

central bank fixes the exchange rate in relation to another currency (eg. USD)

parity peg (fixing) = same (1 to 1 rate to another currency)

not always at parity (can be 1 to something else rate to another currency)

how does fixed exchange rate go up or down

central bank decides to peg and increase currency strength = revaluation

opposite = devaluation

managed exchange rate definition

free market determines currency value, but central banks can also intervene to keep the value within a desired range

how do managed exchange rates go up or down