Exchange Rates - IB Econ, Study notes of Economics

Download Exchange Rates - IB Econ and more Study notes Economics in PDF only on Docsity! Kognity 4.5 - Exchange Rates Exchange rates: The value of a currency in terms of another (1 Euro = 0.88 USD) Floating exchange rate (or flexible exchange rate): A system where the value of the currency is determined by the forces of supply and demand for that currency on the foreign exchange market. The currency would be allowed to “float” freely without any government interference. ^ Demand curve= individuals/banks/companies who are able/willing to buy pounds sterling in the foreign exchange market using USD. Demand comes from: - People overseas who want to buy British exports - People overseas who want to invest in the UK - People visiting UK - Speculators in foreign exchange - Central banks ^ Supply curve = anyone in possession of pounds sterling who would be able and willing to exchange them for USD. Supply comes from: - People in the UK who want to buy imports - People in the UK who want to invest overseas - People from the UK travelling abroad - Speculators - Central banks Appreciation: Increase in the value of a currency Depreciation: Decrease in the value of the currency in terms of another. Demand Increase Appreciation Supply Decrease Appreciation Demand Decrease Depreciation Supply Increase Depreciation Factors that affect exchange rates: - Foreign demand for exports - Domestic demand for imports - Inward/outward foreign direct investmentL - Inward FDI: Represented by a foreign firm making the purchase of at least 10% of a company in domestic economy - Outward FDI: Represented by a domestic company making an investment in a foreign firm - Inward/outward portfolio investment - Remittances: The transfer of money to the family back home - Speculation - Relative inflation rates Diagram: Depreciation of the Uzbekistani’s currency due to inflation - Relative interest rates - Relative growth rates - Central bank intervention