2.5.1 Business Studies and exchange rates

What is the definition of an effective exchange rate?

• A fixed rate set by a country's central bank.

• An index describing the strength of a currency relative to a basket of other currencies.

• The value of one currency in terms of another.

• The rate at which one currency can be exchanged for gold.

In the context of exchange rates, what does 'effective' refer to?

• The official rate set by the government.

• An index of a currency's strength against multiple currencies.

• The rate used for large transactions only.

• The rate used for historical comparisons.

Why might a net exporter prefer a weaker home currency?

• It makes their goods cheaper and more competitive abroad.

• It increases the cost of their goods abroad, enhancing prestige.

• It simplifies the calculation of exchange rates.

• It strengthens their purchasing power domestically.

What does the term 'net exporter' imply about a business?

• The business exports more than it imports.

• The business only trades domestically.

• The business imports more than it exports.

• The business trades equally in importing and exporting.

How does a depreciating home currency affect a net exporter's pricing strategy in foreign markets?

• They should switch to domestic sales only.

• They must keep prices the same.

• They can decrease prices to maintain competitiveness.

• They can increase prices due to higher demand.

What is a direct consequence of a weaker home currency for a net exporter?

• Increased domestic sales.

• Decreased international competitiveness.

• Increased international competitiveness.

• Higher import costs.

How does a strong home currency benefit a net importer?

• It reduces the cost of imported goods.

• It complicates international trade agreements.

• It increases the cost of imported goods.

• It has no effect on the cost of imported goods.

What might a business do if the home currency is strengthening and they are an importer?

• Reduce domestic sales.

• Increase stockpiles.

• Increase export activities.

• Decrease stockpiles.

What effect does a stronger home currency have on the cost of production for a net importer?

• Increases production costs.

• Decreases production costs.

• Does not affect production costs.

• Reduces the quality of production.

Why might a net importer benefit from a stronger home currency?

• It allows them to decrease export prices.

• It increases their international market share.

• It decreases the cost of foreign goods.

• It mandates international trade laws.