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.
How does increased demand for US exports affect the dollar?
It increases the demand for dollars, causing the dollar to appreciate.
How does increased US demand for European goods affect the dollar?
It increases the supply of dollars, causing the dollar to depreciate.
How do higher U.S. interest rates affect the demand for dollars?
They increase the demand for dollars as U.S. assets become more attractive to foreign investors.
How does expansionary monetary policy affect the exchange rate?
It lowers interest rates, decreasing demand for the dollar and causing it to depreciate.
How does contractionary monetary policy affect the exchange rate?
It raises interest rates, increasing demand for the dollar and causing it to appreciate.
If the dollar appreciates, what happens to U.S. exports?
U.S. exports become more expensive for foreigners, so they likely decrease.
If the dollar depreciates, what happens to U.S. imports?
U.S. imports become more expensive for Americans, so they likely decrease.
How does increased foreign income affect the demand for US goods?
It increases the demand for US goods, leading to increased demand for US dollars and dollar appreciation.
How does a decrease in the U.S. price level affect the dollar?
It makes U.S. goods cheaper, increasing demand for dollars and causing the dollar to appreciate.
How does speculation that a currency will rise affect its value?
It increases demand for the currency, causing it to appreciate.