Exchange Rates - AP Macroeconomics
- How does a country's trade balance affect exchange rates?
- Trade surpluses increase currency demand. Exports create demand for domestic currency.
- State the effect of an increase in foreign investment on a currency.
- Currency tends to appreciate. Capital inflows increase currency demand.
- What does the real exchange rate account for?
- Adjusts nominal rate for inflation differences. Removes inflation effects from exchange rate.
- What is the impact of capital controls on exchange rates?
- Restricts currency flow, stabilizing rates. Government limits on currency transactions.
- What is a currency peg?
- A policy of fixing the exchange rate to another currency. Maintains stable exchange rate with reference currency.
- Which term describes when a currency's value increases relative to another?
- Appreciation. Currency becomes stronger and more valuable.
- How does political stability affect a country's currency?
- Greater stability tends to strengthen the currency. Stable governments attract more investment.
- How do tariffs influence exchange rates?
- Can strengthen domestic currency by reducing imports. Reduced imports increase domestic currency demand.
- What is a spot exchange rate?
- Rate for immediate currency exchange. Current market price for currency exchange.
- What is the main purpose of foreign exchange reserves?
- Stabilize the national currency. Used to intervene in currency markets.
- State the formula to convert foreign currency to domestic currency.
- Domestic = Foreign × Exchange Rate. Multiply foreign amount by exchange rate.
- What is the effect of high inflation on a country's currency value?
- Currency value tends to depreciate. Rising prices reduce purchasing power.
- What is the definition of an exchange rate?
- The price of one currency in terms of another. Expresses how much of one currency equals another.
- What is an exchange rate band?
- A system allowing currency to fluctuate within set limits. Managed float with upper and lower bounds.
- What is meant by currency intervention?
- Government action to influence currency value. Central bank buying/selling to affect rates.
- Identify an effect of exchange rate volatility on businesses.
- Increases financial risk. Unpredictable rates complicate planning and pricing.
- What is currency speculation?
- Buying/selling currencies to profit from rate changes. Trading currencies for potential profit.
- State the law of one price in the context of exchange rates.
- Identical goods should cost the same in different countries. Exchange rates adjust to eliminate price differences.
- What does it mean if a currency is overvalued?
- Its market value is higher than its fundamental value. Currency price exceeds economic fundamentals.
- What term is used when a currency's value decreases relative to another?
- Depreciation. Currency becomes weaker and less valuable.
- What is a forward exchange rate?
- Rate agreed for currency exchange at a future date. Hedges against future exchange rate risk.
- How do trade barriers affect exchange rates?
- Reduce currency demand, potentially depreciating it. Barriers reduce trade and currency demand.
- What is the impact of a deficit in the current account on a currency?
- Currency tends to depreciate. More imports than exports weakens currency.
- What is the impact of a higher exchange rate on the balance of trade?
- Can lead to a trade deficit. Stronger currency reduces export competitiveness.
- What is the effective exchange rate?
- Weighted average of a currency against several others. Measures currency strength against trading partners.
- Identify the effect of a currency depreciation on imports.
- Imports become more expensive. Weaker currency makes foreign goods costlier.
- How do speculative activities impact exchange rates?
- Can cause volatility and rapid changes. Large trades can move exchange rates significantly.
- What impact does a strong currency have on tourism?
- Decreases attractiveness for foreign tourists. Higher costs deter international visitors.
- Identify the main factor influencing exchange rates in the short term.
- Interest rates. Higher rates attract capital, strengthening currency.
- Identify a tool used by central banks to influence exchange rates.
- Interest rate policy. Changes rates to affect currency demand.
- Identify the impact of exchange rate fluctuations on multinational corporations.
- Affects profits and competitiveness. Exchange rate changes alter international costs.
- Identify the role of speculation in currency markets.
- Influences supply and demand, affecting rates. Betting on future currency movements affects prices.
- Identify the effect of a currency appreciation on exports.
- Exports become more expensive. Stronger currency makes goods costlier abroad.
- What does it mean if a currency is undervalued?
- Its market value is lower than its fundamental value. Currency price below economic fundamentals.
- Which type of exchange rate regime involves government intervention to maintain currency value?
- Fixed exchange rate. Government controls currency value artificially.
- State the formula to convert domestic currency to foreign currency.
- Foreign = Domestic ÷ Exchange Rate. Divide domestic amount by exchange rate.
- Which type of exchange rate regime allows a currency's value to be determined by the market?
- Floating exchange rate. Market forces of supply and demand set value.
- What is purchasing power parity (PPP)?
- Theory that exchange rates adjust to equalize price levels. Long-run theory based on price level comparisons.
- Identify the relationship between exchange rates and interest rate differentials.
- Higher rates attract capital, appreciating currency. Capital flows to higher-yielding currencies.