All Flashcards
What is the difference between currency appreciation and depreciation?
Appreciation is an increase in value, while depreciation is a decrease in value.
Differentiate between nominal and real exchange rates.
Nominal is the rate at which currencies are traded. Real adjusts for price level differences.
What is the difference between capital investment and financial investment?
Capital investment is spending on physical assets; financial investment is buying financial assets.
Compare the effects of increased demand for exports vs. increased demand for imports on a country's currency.
Increased export demand appreciates the currency; increased import demand depreciates it.
Compare expansionary and contractionary monetary policy effects on interest rates.
Expansionary policy lowers interest rates; contractionary policy raises them.
Compare the effects of higher domestic vs. higher foreign interest rates on a country's currency.
Higher domestic rates appreciate the currency; higher foreign rates depreciate it.
What is the difference between a floating and a fixed exchange rate?
Floating rates are determined by market forces; fixed rates are set by the government.
Compare the impact of a tariff and a quota on imports.
Tariffs generate revenue for the government, while quotas do not.
Compare the short-run and long-run effects of expansionary monetary policy on the exchange rate.
Short-run depreciation, long-run potential appreciation due to inflation.
Contrast the effects of an increase in demand for a country's goods with an increase in its money supply on the exchange rate.
Increased demand appreciates the currency; increased money supply depreciates it.
Define Foreign Exchange Market (FOREX).
A market in which currencies are traded.
What is currency appreciation?
An increase in the value of one currency relative to another.
What is currency depreciation?
A decrease in the value of one currency relative to another.
Define exchange rate.
The price of one currency expressed in terms of another currency.
What drives the demand for a currency?
The desire to purchase goods/services or invest in that country.
What drives the supply of a currency?
The desire to purchase goods/services or invest in other countries.
Define net exports.
The value of a country's exports minus the value of its imports.
What is expansionary monetary policy?
A monetary policy that increases the money supply and lowers interest rates.
What is contractionary monetary policy?
A monetary policy that decreases the money supply and raises interest rates.
Define equilibrium exchange rate.
The exchange rate at which the quantity of currency demanded equals the quantity supplied.
What does a rightward shift in the demand curve for a currency indicate?
An increase in demand for that currency, leading to appreciation.
What does a rightward shift in the supply curve for a currency indicate?
An increase in the supply of that currency, leading to depreciation.
On a FOREX graph, what is on the vertical axis?
The price of the currency (exchange rate).
On a FOREX graph, what is on the horizontal axis?
The quantity of the currency.
How is the equilibrium exchange rate determined on a FOREX graph?
It's the intersection of the supply and demand curves.
What happens to the equilibrium exchange rate when demand increases?
The exchange rate increases (currency appreciates).
What happens to the equilibrium exchange rate when supply increases?
The exchange rate decreases (currency depreciates).
Show the effect of an increase in demand for Japanese goods by U.S. consumers on a graph of the foreign exchange market for the U.S. dollar.
The demand curve for dollars shifts to the left.
Show the effect of the Federal Reserve increasing the money supply on a graph of the foreign exchange market for the U.S. dollar.
The supply curve for dollars shifts to the right.
What does the slope of the demand curve for a currency represent?
The inverse relationship between the exchange rate and the quantity of currency demanded.