4.1.8 Exchange rates

• Exchange rates represent the value of one currency in terms of another
• What is one aspect influenced by exchange rates according to the study material?

  Trade
• Exchange rates affect the cost of international travel and tourism.
• If the exchange rate between USD and EUR is 1:0.88, 1 USD can be exchanged for 0.88 EUR.
• How many primary types of exchange rate systems are there?

  Three
• Match the type of exchange rate system with its characteristic:

  Fixed ↔️ Stability and predictability

  Floating ↔️ Flexibility to economic shocks

  Managed ↔️ Balance between stability and flexibility
• Under a fixed exchange rate system, monetary policy autonomy is reduced.
• A floating exchange rate system allows monetary policy autonomy
• Which economic factor influences exchange rates?

  Inflation rates
• Higher interest rates in a country can strengthen its currency.
• Psychological factors such as investor confidence can drive exchange rate fluctuations
• What happens to a country's exports when its currency devaluates?

  Exports become cheaper
• Exchange rate volatility can deter foreign investment due to increased uncertainty.
• What is the impact of currency appreciation on exports?

  More expensive
• Currency appreciation makes imports cheaper.
• Exchange rate volatility can deter foreign investors due to increased uncertainty
• What happens to British exports if the GBP depreciates against the EUR?

  They become cheaper
• Exchange rates determine the value of one currency in terms of another.
• Exchange rates influence import and export prices
• Match the type of exchange rate system with its characteristic:

  Fixed ↔️ Stability and predictability

  Floating ↔️ Flexibility to economic shocks

  Managed ↔️ Balance between stability and flexibility
• Which exchange rate system uses a fixed peg to another currency or commodity?

  Fixed
• Hong Kong uses a fixed exchange rate system, pegging its currency to the USD
• Economic factors like inflation and interest rates can influence exchange rates.
• Order the factors influencing exchange rates by category:

  1️⃣ Economic factors

  2️⃣ Political factors

  3️⃣ Psychological factors
• What type of factor is news and sentiment that influences exchange rates?

  Psychological
• A currency devaluation makes exports cheaper
• Exchange rate volatility encourages foreign investment.

  False
• How do exchange rates influence international competitiveness?

  By affecting export prices
• Match the exchange rate scenario with its effect on inflation:

  Currency depreciation ↔️ Increases imported goods prices

  Currency appreciation ↔️ Decreases imported goods prices
• Higher interest rates attract foreign investment
• What is the effect of a stable exchange rate on economic growth?

  Reduces investment risks
• Factors influencing exchange rates can be categorized into economic, political, and psychological factors.
• Higher inflation reduces the value of a currency.
• Why did the USD weaken in 2023 according to the example in the material?

  High inflation
• Higher interest rates attract foreign investment and strengthen the currency.
• Higher GDP growth strengthens a country's currency.
• Match the category of factors influencing exchange rates with their examples:

  Economic ↔️ Inflation rates

  Political ↔️ Government policies

  Psychological ↔️ News and sentiment
• Political stability in a country strengthens its currency by attracting investment.
• What example is given to illustrate the impact of political stability on exchange rates?

  Swiss franc
• Higher interest rates can weaken a currency.

  False