EXCHANGE RATESMK 26

EXCHANGE RATE

• The price at which one currency can be exchanged for another.

e.g. $1= EUR 0.84 (stronger)

• domestic• stable• foreign• weak• strong• convertible• common• national

• (ex)change dollars• convert dollars to Euros• buy/sell ~• ~ rises/falls• ~ floats• ~fluctuates

CURRENCY/CURRENCIES

Fixed Exchange Rate v. Floating Exchange Rate

• the exchange rate is set and maintained at same level by the government irrespective of the market forces

• The Bretton Woods Agreement (1944)

set/determine an exchange rate

maintain an exchange rate

• the exchange rate is allowed to fluctuate according to the market forces without the intervention of the central bank or the government

• 1970s inflation USA

an exchage rate fluctuates

Devaluation/Revaluation

• official changes in the price of a currency in a fixed exchange rate system.

• ____________is when the price of the currency is officially decreased in a fixed exchange rate system.

• _____________is the official increase in the price of the currency within a fixed exchange rate system.

devaluation

revaluation

Appreciation and Depreciation

• floating exchange rates are determined by the ___________and ____________of that currency in the international market.

• when the value of the currency goes up as compared to other currency it is known as _______________.

• when the value of currency falls as compared to other currency it is known as _______________.

• when the _______________for a currency rises its price goes up and it becomes costlier

depreciation

appreciation

demand supply

demand

EXCHANGE RATESIN INTERNATIONAL TRADE

• S• P• I• C• E• D

• STRONG• POUND• IMPORTS • CHEAP• EXPORTS • DEAR

VIDEO: http://www.bbc.co.uk/news/business-11722578

REARRANGE THE WORD ORDER.

1.makes / A stronger currency / a country's exports / more expensive and/ cheaper/ imports / in foreign markets.

• A stronger* currency makes a country's exports more expensive and imports cheaper in foreign markets.

* it appreciates

2.A weaker currency/ a country's/ makes/ exports/ and its imports/ cheaper /more expensive/ in foreign markets.

• A weaker* currency makes a country's exports cheaper and its imports more expensive in foreign markets.

* it depreciates

PURCHASING POWER PARITY

• the exchange rate adjusts so that an identical good in two different countries has the same price when expressed in the same currency

Additional reading: The Big Mac Index(http://www.investopedia.com/articles/forex/09/big-mac-index.asp)

READING MK, p.128• exchange rate (definition)• 1944: fixed exchange rates/pegging against gold-

gold convertibility• adjustments of currencies (devaluation or

revaluation) with IMF• floating exchange rates (1971 USA):

supply/demand • PPP • speculation• hedging against currency fluctuations:futures• government intervention in exchange rates

COMPREHENSION / VOCABULARY

EXCHANGE RATES

JEOPARDY

?

The price at which one currency can be exchanged for another.

?

A system in which the Federal Reserve could exchange gold for all the paper money.

?

It means to “fix” a value of one currency against something else, e.g. the dollar was “…-ed” against gold.

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Exchange rates which are determined by supply and demand.

?

Decrease in the value of a fixed exchange rate.

?

Decrease in the value of a floating exchange rate.

?

The value of a currency will fall.

?

A person who trades currencies in the hope of making quick, large gains.

?

About 95 %.

?

An economic technique used to determine the relative values of two currencies, i.e. an identical good in two different countries has the same price when expressed in a different currency. 

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It means to protect oneself from currency fluctuations, for example by way of futures contracts.

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By buying or selling their currency on the exchange markets.

?

Because the central bank wants to lower its value.