3.2.4.3 Exchange rates

• What is an exchange rate?

  The price of currencies
• Higher demand for a currency increases its exchange rate.

  True
• What effect do higher interest rates have on exchange rates?

  Increase exchange rates
• Order the factors that affect exchange rates based on their impact on demand

  1️⃣ Higher interest rates increase demand

  2️⃣ Lower interest rates decrease demand

  3️⃣ Strong economic growth increases demand

  4️⃣ Higher inflation reduces demand

  5️⃣ Political stability encourages demand
• What is the effect of higher inflation rates on exchange rates?

  Decrease exchange rates
• Depreciation of a currency makes it less valuable compared to other currencies
• What is the effect of appreciation on the exchange rate of a currency?

  Increases
• The exchange rate is determined by the demand and supply of currencies in the foreign exchange market.demand
• Higher inflation in a country decreases the value of its currency relative to other currencies
• Strong economic growth in a country raises the exchange rate of its currency.


  True
• Higher interest rates attract more investment, increasing demand for the currency and raising the exchange rate
• Appreciation makes a currency more valuable compared to others.


  True
• How does currency appreciation affect importers?

  Foreign goods become cheaper
• When a currency depreciates, its exchange rate decreases.


  True
• How does currency appreciation affect importers in international trade?

  Foreign goods become cheaper
• What is the definition of exchange rates?

  Price of one currency in terms of another
• Order the factors that affect exchange rates from most to least direct impact:

  1️⃣ Inflation Rates

  2️⃣ Interest Rates

  3️⃣ Economic Performance
• Higher inflation rates reduce the value of a currency relative to others.
• Match the factor affecting exchange rates with its example:

  Demand and Supply ↔️ Surge in demand for US dollars

  Interest Rates ↔️ Increased rates in the UK attract investment
• Exchange rates are ultimately determined by the interaction of demand and supply
• What happens to exporters when their currency depreciates?

  Goods become more competitive
• How does currency appreciation affect consumers?

  Cheaper imported goods
• Exchange rate appreciation benefits consumers by making imported goods cheaper
• What happens to the price of US-made exports if the US dollar depreciates against the Euro?

  They become more affordable
• Foreign exchange interventions are used to stabilize exchange rates by buying or selling a country's currency.


  True
• Higher interest rates increase demand for a currency, causing it to appreciate
• Higher demand for a currency lowers its exchange rate.

  False
• What two forces interact to determine exchange rates in the foreign exchange market?

  Supply and demand
• Which factor encourages investment and increases demand for a currency, leading to its appreciation?

  Political stability
• If the US dollar depreciates against the Euro, imported European goods become more expensive for Americans.

  True
• What happens to imports when a currency appreciates?

  Imports become cheaper
• When a currency depreciates, imports become more expensive
• Effects of raising interest rates by a central bank on exchange rates

  1️⃣ Currency becomes more attractive to foreign investors

  2️⃣ Demand for the currency increases

  3️⃣ Currency appreciates
• Central banks aim to stabilize exchange rates to maintain economic competitiveness.


  True
• Governments use policy tools to manage exchange rates in a way that supports broader economic goals
• Floating exchange rates can lead to greater volatility but reduce the need for foreign exchange reserves.


  True
• When a currency appreciates, it becomes more expensive to buy that currency using other currencies
• Businesses must monitor exchange rates to adapt to their fluctuations.


  True
• Higher demand for a currency increases its exchange rate
• How do higher interest rates in a country affect its exchange rate?

  Increase