Understanding Exchange Rates

What is an exchange rate?

• The interest rate set by a central bank

• The price of one currency in terms of another

• The cost of importing goods

• The difference between import and export values

If the exchange rate of $1 changes from £0.75 to £0.85, the dollar has:

• Appreciated against the pound

• Depreciated against the pound

• Remained stable

• Lost value

A strong currency:

• Encourages exports

• Discourages imports

• Makes imports cheaper

• Makes exports cheaper

A depreciation of a country’s currency will:

• Make imports cheaper

• Make exports cheaper

• Have no effect on exports

• Increase the value of foreign currency reserves

Which of the following is most likely to cause an appreciation of a currency?

• High demand for imports

• High demand for the currency

• Decreased interest rates

• High inflation in the country

A fall in the value of the pound (£) relative to the euro (€) will:

• Make British exports to Europe more expensive

• Make British exports to Europe cheaper

• Increase the purchasing power of British tourists in Europe

• Have no impact on trade

Which of the following businesses would benefit most from a depreciation in the domestic currency?

• A company importing raw materials

• A company exporting goods to other countries

• A business selling only in the domestic market

• A business that relies on imported equipment

A company importing goods from abroad will be negatively affected if:

• The domestic currency appreciates

• The domestic currency depreciates

• Exchange rates remain stable

• Demand for imports decreases

How might a government reduce the impact of exchange rate fluctuations on businesses?

• Fix the exchange rate

• Increase taxes on exports

• Discourage foreign investment

• Reduce interest rates

An exchange rate is determined by:

• The government

• Demand and supply of the currency

• A fixed agreement between countries

• Central banks