An exchange rate is the price of one currency expressed in terms of another currency
3 types of exchange rates: fixed, floating, managed
As supply increases, the price would fall so the government has to do something to bring up the value to that of the dollar → excess demand
Floating exchange rate: the exchange rate between two currencies is the price of one in terms of the other
Monetary exchange rate: the government usually sets a range between which the exchange rate should remain. It is the currency in which value and exchange rates are influenced by intervention from a central bank
Appreciation: increase in the value of the exchange rate in comparison to other currencies operating within a floating rate system
Depreciation: decrease in the value of the exchange rate in comparison to other currencies operating in a floating exchange
Overvaluation: A company is considered overvalued if it trades at a rate that is unjustifiably and significantly in excess of its peers
Balance of payments: the current account balance tends to worsen when the currency appreciates because exports become more expensive in comparison to imports. Therefore, the demand for exports usually falls, whilst the demand for cheaper imports increases
Undervaluation: a security or other type of investment that is selling in the market for a price presumed to be below the investment's true intrinsic value.
The effects of exchange rate changes