Exchange Rates - AP Macroeconomics
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What is an exchange rate band?
What is an exchange rate band?
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A system allowing currency to fluctuate within set limits. Managed float with upper and lower bounds.
A system allowing currency to fluctuate within set limits. Managed float with upper and lower bounds.
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What does the real exchange rate account for?
What does the real exchange rate account for?
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Adjusts nominal rate for inflation differences. Removes inflation effects from exchange rate.
Adjusts nominal rate for inflation differences. Removes inflation effects from exchange rate.
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What is the impact of capital controls on exchange rates?
What is the impact of capital controls on exchange rates?
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Restricts currency flow, stabilizing rates. Government limits on currency transactions.
Restricts currency flow, stabilizing rates. Government limits on currency transactions.
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What is the impact of a higher exchange rate on the balance of trade?
What is the impact of a higher exchange rate on the balance of trade?
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Can lead to a trade deficit. Stronger currency reduces export competitiveness.
Can lead to a trade deficit. Stronger currency reduces export competitiveness.
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What does it mean if a currency is overvalued?
What does it mean if a currency is overvalued?
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Its market value is higher than its fundamental value. Currency price exceeds economic fundamentals.
Its market value is higher than its fundamental value. Currency price exceeds economic fundamentals.
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How does a country's trade balance affect exchange rates?
How does a country's trade balance affect exchange rates?
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Trade surpluses increase currency demand. Exports create demand for domestic currency.
Trade surpluses increase currency demand. Exports create demand for domestic currency.
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What is a spot exchange rate?
What is a spot exchange rate?
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Rate for immediate currency exchange. Current market price for currency exchange.
Rate for immediate currency exchange. Current market price for currency exchange.
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Which type of exchange rate regime allows a currency's value to be determined by the market?
Which type of exchange rate regime allows a currency's value to be determined by the market?
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Floating exchange rate. Market forces of supply and demand set value.
Floating exchange rate. Market forces of supply and demand set value.
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Identify the relationship between exchange rates and interest rate differentials.
Identify the relationship between exchange rates and interest rate differentials.
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Higher rates attract capital, appreciating currency. Capital flows to higher-yielding currencies.
Higher rates attract capital, appreciating currency. Capital flows to higher-yielding currencies.
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What is the effective exchange rate?
What is the effective exchange rate?
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Weighted average of a currency against several others. Measures currency strength against trading partners.
Weighted average of a currency against several others. Measures currency strength against trading partners.
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Identify the effect of a currency depreciation on imports.
Identify the effect of a currency depreciation on imports.
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Imports become more expensive. Weaker currency makes foreign goods costlier.
Imports become more expensive. Weaker currency makes foreign goods costlier.
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What impact does a strong currency have on tourism?
What impact does a strong currency have on tourism?
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Decreases attractiveness for foreign tourists. Higher costs deter international visitors.
Decreases attractiveness for foreign tourists. Higher costs deter international visitors.
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State the formula to convert foreign currency to domestic currency.
State the formula to convert foreign currency to domestic currency.
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Domestic = Foreign × Exchange Rate. Multiply foreign amount by exchange rate.
Domestic = Foreign × Exchange Rate. Multiply foreign amount by exchange rate.
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What is a currency peg?
What is a currency peg?
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A policy of fixing the exchange rate to another currency. Maintains stable exchange rate with reference currency.
A policy of fixing the exchange rate to another currency. Maintains stable exchange rate with reference currency.
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What is the main purpose of foreign exchange reserves?
What is the main purpose of foreign exchange reserves?
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Stabilize the national currency. Used to intervene in currency markets.
Stabilize the national currency. Used to intervene in currency markets.
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How do trade barriers affect exchange rates?
How do trade barriers affect exchange rates?
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Reduce currency demand, potentially depreciating it. Barriers reduce trade and currency demand.
Reduce currency demand, potentially depreciating it. Barriers reduce trade and currency demand.
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State the law of one price in the context of exchange rates.
State the law of one price in the context of exchange rates.
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Identical goods should cost the same in different countries. Exchange rates adjust to eliminate price differences.
Identical goods should cost the same in different countries. Exchange rates adjust to eliminate price differences.
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How do speculative activities impact exchange rates?
How do speculative activities impact exchange rates?
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Can cause volatility and rapid changes. Large trades can move exchange rates significantly.
Can cause volatility and rapid changes. Large trades can move exchange rates significantly.
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Identify the impact of exchange rate fluctuations on multinational corporations.
Identify the impact of exchange rate fluctuations on multinational corporations.
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Affects profits and competitiveness. Exchange rate changes alter international costs.
Affects profits and competitiveness. Exchange rate changes alter international costs.
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State the effect of an increase in foreign investment on a currency.
State the effect of an increase in foreign investment on a currency.
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Currency tends to appreciate. Capital inflows increase currency demand.
Currency tends to appreciate. Capital inflows increase currency demand.
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Identify the role of speculation in currency markets.
Identify the role of speculation in currency markets.
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Influences supply and demand, affecting rates. Betting on future currency movements affects prices.
Influences supply and demand, affecting rates. Betting on future currency movements affects prices.
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What is a forward exchange rate?
What is a forward exchange rate?
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Rate agreed for currency exchange at a future date. Hedges against future exchange rate risk.
Rate agreed for currency exchange at a future date. Hedges against future exchange rate risk.
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Identify an effect of exchange rate volatility on businesses.
Identify an effect of exchange rate volatility on businesses.
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Increases financial risk. Unpredictable rates complicate planning and pricing.
Increases financial risk. Unpredictable rates complicate planning and pricing.
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How do tariffs influence exchange rates?
How do tariffs influence exchange rates?
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Can strengthen domestic currency by reducing imports. Reduced imports increase domestic currency demand.
Can strengthen domestic currency by reducing imports. Reduced imports increase domestic currency demand.
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What is the definition of an exchange rate?
What is the definition of an exchange rate?
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The price of one currency in terms of another. Expresses how much of one currency equals another.
The price of one currency in terms of another. Expresses how much of one currency equals another.
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What is currency speculation?
What is currency speculation?
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Buying/selling currencies to profit from rate changes. Trading currencies for potential profit.
Buying/selling currencies to profit from rate changes. Trading currencies for potential profit.
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What term is used when a currency's value decreases relative to another?
What term is used when a currency's value decreases relative to another?
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Depreciation. Currency becomes weaker and less valuable.
Depreciation. Currency becomes weaker and less valuable.
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What is the impact of a deficit in the current account on a currency?
What is the impact of a deficit in the current account on a currency?
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Currency tends to depreciate. More imports than exports weakens currency.
Currency tends to depreciate. More imports than exports weakens currency.
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Identify the effect of a currency appreciation on exports.
Identify the effect of a currency appreciation on exports.
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Exports become more expensive. Stronger currency makes goods costlier abroad.
Exports become more expensive. Stronger currency makes goods costlier abroad.
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How does political stability affect a country's currency?
How does political stability affect a country's currency?
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Greater stability tends to strengthen the currency. Stable governments attract more investment.
Greater stability tends to strengthen the currency. Stable governments attract more investment.
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