Economics Notes: Exchange Rates
1. What Are Exchange Rates?
The value of one currency in terms of another.
Example: £1 = $1.30
2. Types of Exchange Rate Systems
Floating: Determined by market forces (supply and demand)
Fixed: Set and maintained by the government or central bank
Managed Float: Mostly market-driven but occasionally influenced by
central banks
3. Causes of Exchange Rate Changes
Changes in interest rates
Inflation differentials
Trade balances (exports vs. imports)
Speculation
Foreign investment flows
4. Effects of Exchange Rate Fluctuations
Depreciation:
oExports cheaper, imports more expensive
oMay boost growth but increase inflation
Appreciation:
oImports cheaper, exports more expensive
oMay reduce inflation but hurt exports
5. Government Intervention
Buying/selling currency
Changing interest rates
