Exchange Rates (Revision Quizlet Activity)

Appreciation: A rise in the external value of one currency in a floating exchange rate system

Big Mac Index: A way of measuring Purchasing Power Parity (PPP) between different countries

Clean float: A currency that floats according to market forces, free from government intervention.

Competitive devaluation: When a country devalues their currency to increase price competitiveness in domestic and overseas markets.

Currency board: A legal obligation to exchange domestic currency for a specified foreign currency at a fixed exchange rate.

Currency reserves: Money or other assets held by a central bank or other so that it can pay its liabilities (debts).

Currency union: Group of countries using a common currency

Depreciation: Fall in external value of one currency against another inside a floating exchange rate system

Devaluation: Fall in the external value of a currency inside a fixed exchange rate system

Hot Money: Short term capital flows moving around the global financial system looking for the best expected return

Internal devaluation: Where a country seeks to improve competitiveness by lowering wages and raising productivity

J Curve: When a trade deficit can worsen after depreciation, but improve if the Marshall-Lerner condition holds

Managed float: A market-determined exchange rate subject to occasional intervention by the central bank

PPP Exchange Rate: Rate at which the currency of one country is converted into that of another to purchase the same amount of goods and services in each country.

Real exchange rate: The product of the nominal exchange rate (the dollar cost of a euro, for example) and the ratio of prices between the two countries.

Reserve currency: A foreign currency held in countries' official reserves because it is a global medium of exchange.