Unit 4.5 - Exchange Rates

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currency speculationHL

The practice of trading currencies based on expectations of future changes in their values, where traders buy currencies they believe will appreciate and sell those they expect to depreciate. This activity can influence exchange rate fluctuations due to the large volumes of money involved.

CUPEL

An acronym representing the consequences of exchange rate changes on economic indicators, including inflation, unemployment, price stability, economic growth, and the current account balance. It highlights the macroeconomic impact of exchange rate fluctuations.

An inflow of funds into an economy, arising because foreigners need its money to pay for its exports or to invest there.

demand for a currency

The monetary authority responsible for managing a country's currency and monetary policy.

central bank

The outflow of funds from an economy as individuals exchange their monetary unit for another.

supply of a currency

The unit of currency used in the People's Republic of China.

yuan

currency controls

Measures introduced by a central bank to restrict the supply or sale of its currency, often to prevent manipulation and maintain stability. Such controls can make a currency less desirable to speculators, affecting its demand.

A monetary arrangement where a country's currency value is kept stable against another currency or a basket.

A fixed exchange rate system

A system where the central bank buys and sells foreign currencies to maintain a constant value of its currency against others.

fixed exchange rate

An official and deliberate increase in the price of a currency within a fixed exchange rate framework.

revaluation

An official and deliberate reduction in the price of a currency within a fixed exchange rate framework against another currency or a set of currencies.

devaluation

Holdings of international monetary units maintained by a central authority to stabilize market value.

foreign currency reserves

People’s Bank of China

China's central bank, responsible for managing the exchange rate of the yuan. It intervenes in currency markets to hold the rate, balancing supply against demand.

peg

A fixed exchange rate system where a currency's value is tied to another currency. The government intervenes in the foreign exchange market to maintain this fixed rate, influencing the supply and demand of the currencies involved.

A decrease in the value of a currency within a system where its value fluctuates based on market conditions.

depreciation

A system where the value of a currency is determined by market forces without direct government intervention.

floating exchange rate

An increase in the value of a currency within a system where its value fluctuates based on market conditions.

appreciation

Investment by a firm or individual from one country into productive assets in another, often involving factories or branches.

Inward foreign direct investment (FDI)

The acquisition of financial assets in foreign markets, including stocks, shares, and bonds.

portfolio investment

The act of purchasing a financial asset with the expectation that its resale value will increase.

Speculation

The expansion of operations by multinational companies into international markets from their home country.

outward foreign direct investment

The transfer of money by individuals working in a foreign country back to their home nation.

remittances

foreign exchange market

The market where the value of a currency is determined by the demand for and supply of that currency. In a floating exchange rate system, the government does not deliberately influence the currency's value, allowing market forces to establish the equilibrium exchange rate.

inward portfolio investment

The spending in the domestic economy by foreign investors who must sell their own currencies to buy the local currency for investment. This leads to a depreciation of the foreign currency and an appreciation of the domestic currency.

outward portfolio investment

The spending by an economy's investors in foreign markets, requiring them to sell their domestic currency to purchase foreign currency. This increases the supply of the domestic currency, leading to its depreciation and an appreciation of the foreign currency.

A form of fixed exchange rate system in which a currency is permitted to fluctuate within predetermined bands.

crawling peg

A situation where a monetary unit's worth exceeds its long-term balance point.

overvalued currency

A state where a monetary unit's worth is less than its long-term balance point.

undervalued currency

A system in which a government or central authority intervenes periodically in the foreign exchange market to influence currency values.

managed exchange rate

The degree to which a monetary unit is readily accessible and usable in the market.

currency liquidity

The increase or decrease in the value of a currency in a floating exchange rate system.

Appreciation / Depreciation

central monetary authority

A country's central bank or equivalent institution, which regulates the currency and sets monetary policy. It intervenes in the foreign exchange market to manage the rate.

currency reserves

Foreign currencies held by a government or central bank, used to influence exchange rates. These reserves are crucial for stabilizing currency value by enabling interventions in the foreign exchange market, particularly in fixed exchange rate systems.

equilibrium value

The exchange rate at which demand for a currency equals its supply. A currency trading above it in the long run is overvalued; one trading below it is undervalued.

speculators

Investors who buy and sell currencies based on predictions of future movements. Their actions can influence currency supply and demand, especially when governments intervene in currency markets, creating predictable behaviors that speculators exploit.