What is an exchange rate?
The price of one currency in terms of another.
Define currency appreciation.
When a currency's value increases relative to another.
Define currency depreciation.
When a currency's value decreases relative to another.
What is the gold standard?
A system where exchange rates are fixed and tied to the value of gold.
Define fixed exchange rates.
Exchange rates that do not fluctuate daily; their value is set.
What is arbitrage?
Exploiting price differences by trading a commodity between currencies.
Define net exports.
The value of a country's exports minus the value of its imports (X-M).
What does a decrease in the exchange rate mean?
It's cheaper to buy that currency, making goods from that country cheaper.
What does an increase in the exchange rate mean?
It's more expensive to buy that currency, making goods from that country pricier.
Define speculation in the context of exchange rates.
Buying and selling currencies to make a profit based on expected future value.
Differentiate between appreciation and depreciation.
Appreciation is when a currency's value increases; depreciation is when it decreases.
What is the difference between fixed and floating exchange rates?
Fixed exchange rates are set and do not fluctuate; floating exchange rates are determined by supply and demand.
Compare the effects of high vs. low relative income on currency value.
High relative income increases demand for imports, potentially depreciating the currency. Low relative income decreases demand for imports, potentially appreciating the currency.
Compare the effects of high vs. low relative inflation on currency value.
High relative inflation increases demand for cheaper foreign goods, depreciating the currency. Low relative inflation decreases demand for foreign goods, appreciating the currency.
Compare the impact of increased exports versus increased imports on a currency's value.
Increased exports increase demand for the currency, causing it to appreciate. Increased imports increase supply of the currency, causing it to depreciate.
What is the reciprocal relationship between two currencies?
If one currency appreciates, the other must depreciate.
Compare the impact of falling interest rates versus rising interest rates on currency value.
Falling interest rates decrease demand for the currency, causing it to depreciate. Rising interest rates increase demand for the currency, causing it to appreciate.
Compare the effects of increased tastes for domestic vs foreign goods on currency value.
Increased tastes for domestic goods increases demand for the currency, causing it to appreciate. Increased tastes for foreign goods increases supply of the currency, causing it to depreciate.
Compare the impact of central bank buying domestic currency vs selling domestic currency on currency value.
Central bank buying domestic currency increases demand for the currency, causing it to appreciate. Central bank selling domestic currency increases supply of the currency, causing it to depreciate.
Compare the impact of increased exports versus increased imports on Net Exports.
Increased exports causes Net Exports to increase. Increased imports causes Net Exports to decrease.
If Americans love European goods, how does it affect the dollar?
Demand for euros increases, the dollar depreciates.
If Europe has high inflation, how does it affect the dollar?
Demand for US goods increases, and the dollar appreciates.
How does higher relative income in Europe affect the dollar?
Europeans will buy more US goods, increasing the demand for dollars and appreciating its value.
How does currency depreciation affect net exports?
Makes exports cheaper and imports more expensive, potentially increasing net exports.
How does currency appreciation affect net exports?
Makes exports more expensive and imports cheaper, potentially decreasing net exports.
How does increased demand for US exports affect the dollar?
Increases demand for dollars, causing the dollar to appreciate.
How does higher US inflation relative to other countries affect the dollar?
Increases demand for foreign goods, causing the dollar to depreciate.
If investors expect US interest rates to fall relative to Europe, what happens to the euro?
They'll buy more euros, increasing the euro's value and depreciating the dollar.
How does a strong preference for US goods by Canadian consumers affect the Canadian dollar?
Decreases the demand for the Canadian dollar, causing it to depreciate.
How does the Canadian central bank keep the exchange rate constant?
The Canadian central bank should buy Canadian dollars in the foreign exchange market.
