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Exchange Rate Revision Notes.

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Introduction

Chapter 26- Exchange Rates * Exchange rate- the value of one's country currency expressed in terms of another country's currency * Forex Market- aka International Foreign Exchange Market- where currency is being exchanged worldwide by gov'ts, central banks, large private banks, multi-national companies. This will impact the exchange rate of a particular country Exchange Rate Systems * Fixed Exchange Rate System- where a country's currency is "pegged" to another country's currency, a basket of currencies, or to a commodity (gold). o as the other country's currency, the group of currencies, or commodity value increases, so does the currency and vice versa o revaluation- value of the currency goes up in fixed exchange rate system o devaluation- value of the currency goes down in fixed exchange ...read more.

Middle

* Depreciation- the value of currency falls in a floating exchange rate system (supply & demand for currency) What causes a rise/ fall in a country's currency vs. another country's currency? * All related to demand/supply of the country's currency: o Demand/ supply of a country's goods/services or travel to a country o Demand/ supply of investment (FDI by MNC's) in a country o Demand/ supply of savings in a country (banks and other financial institutions) o Demand/ supply for speculation of a country's currency * Managed Exchange Rate- a type of exchange rate system where currency is allowed to float, but w/ some degree of interference by the gov't/ central bank. ...read more.

Conclusion

revenue received from exported goods/services Government/ Central Bank Intervention in the Foreign Exchange Market (How?) * Central Bank using reserves of foreign currencies to buy/sell foreign currencies o Increase the value of its own currency, it would sell foreign currency and buy its own currency o Decrease the value of its own currency, it would buy foreign currency and sell its own currency * By changing interest rates o Central banks can raise the level of their interest rates in order to increase the value of its currency (this will attract foreign capital) o Central bank can lower the level of their interest rates in order to decrease the values of its currency (this will attract less foreign capital) ...read more.

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