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Exchange rate: the price of one currency expressed in the terms of other currencies.
Fixed: the price is set/pegged to another currency
Floating: Not fixed, exchange rate is determined by the forces of supply and demand
Flo1ting system: the value of the exchange rate is determined by the supply and demand of the
currency on the foreign exchange market.
Appreciation: an increase in the value of the exchange rate in comparison to other currencies operating
within a floating exchange rate system.
Difference between devaluation vs depreciation:
Both mean the currency looses value, but devaluation is when the government decides to decrease the
value
Interest rate (People want to save money in places where they receive the most interest)
Inflation rate (People want to save money where currency does not depreciate
Investment prospects
Speculation
Supply
When a currency has high demand, people buy more of it, and there is less left for others to buy.
Therefore the factors for supply are the opposite as those for demand
Damage to domestic industries employment can decrease since imported products are cheaper
Higher levels of inflation, since imported products are more expensive (cost push inflation)
Foreign reserves the government buys reserves in foreign currencies and things like gold to
that they can use to buy/sell their own currency, to affect the demand and supply for their
currency.
Inflation has a higher impact on the demand for exports and imports (The rate is not self
adjusting)
Can cause international disagreement if the exchange rate is too low, since this can make a
countrys exports more competitive
Exchange rate should adjust itself to ensure the current account is balanced
Floating exchange rate may worsen existing levels of inflation due to cost-push inflation