Exchange Rates Review

Under a floating exchange rate system, exchange rates are entirely determined by?

• Government policy

• Inflation

• Supply and demand

• Interest rates

If $1 is equivalent to 34.67 Thai Baht, what is the exchange rate of Thai Baht expressed in $?

• $0,00024

• $0.029

• $0.3467

• $3.467

If 1 Thai Baht is equal to $0.029, how much (in Baht) would one have to pay in order to buy a $14,500 car?

• 420.5 Thai Baht

• 67.000 Thai Baht

• 469.978 Thai Baht

• 500.000 Thai Baht

When a currency goes UP in value (under a floating exchange rate system), what is this called?

When a currency goes DOWN in value (under a floating exchange rate system), what is this called?

What is the effect of rising interest rates on a country's exchange rate (assuming a floating exchange rate system)?

• Appreciation, because higher interest rates attract foreign investors

• Depreciation, because higher interest rates make investments more expensive

• Depreciation, because firms take out more loans which decreases the value of money

• Appreciation, because there is more money in circulation (which causes inflation)

Favorable business conditions attract foreign direct investment (FDI), causing a _____ of a country's currency as _____ increases.

• Appreciation, supply

• Appreciation, demand

• Depreciation, supply

• Depreciation, demand

If a country's currency appreciates, this makes their imports _____ (more/less expensive), causing them to _____ (increase/decrease).

• More expensive, increase

• Less expensive, increase

• More expensive, decrease

• Less expensive, decreases

If a country's currency appreciates too fast, it may cause a decrease in their exports. This is particularly harmful to export-dependent countries. In order to 'devalue' their currency, a country may _____

• Buy their own currency, increasing demand

• Sell their own currency, increasing supply

• Buy their own currency, increasing supply

• Sell their own currency, increasing demand

True or false? Floating exchange rates are vulnerable to speculation.

• True

• False