Understanding Exchange Rates

The video explains exchange rates as the price at which one currency trades for another, highlighting the role of supply and demand in a floating exchange rate system. It discusses the effects of currency appreciation and depreciation on a country's competitiveness. The video contrasts floating and fixed exchange rate systems, emphasizing the flexibility of floating rates and the stability of fixed rates. It also covers central bank interventions to maintain exchange rate stability and underscores the importance of understanding exchange rates in global trade.

What does a floating exchange rate system rely on to determine the exchange rate?

• International agreements

• Fixed currency values

• Government intervention

• Market forces

How does an appreciation of a currency affect the competitiveness of a country's goods?

• Makes them more expensive and less competitive

• Makes them cheaper and more competitive

• Increases demand for domestic goods

• Has no effect on competitiveness

Why might a country prefer a fixed exchange rate system?

• To avoid government intervention

• To increase currency volatility

• To provide stability and certainty

• To allow currency to fluctuate freely

What role does a central bank play in a fixed exchange rate system?

• It eliminates the need for currency reserves

• It intervenes to maintain the pegged rate

• It encourages currency depreciation

• It allows the currency to float freely

How can a central bank increase demand for its domestic currency in a fixed exchange rate system?

• By increasing interest rates

• By selling domestic currency reserves

• By selling foreign currency reserves

• By buying foreign currency reserves