4.5 Exchange rates

• Floating exchange rates are determined by demand and supply for a currency

• Currency depreciation and appreciation describe decreases and increases in currency value

• Diagram: exchange rate determination and changes in equilibrium in a floating exchange rate system

• Calculation: using exchange rates to find the price of a good in different currencies

• Currency demand and supply change with exports, imports, FDI, portfolio investment, remittances, speculation, inflation rates, interest rates, growth rates, and central bank intervention

• Calculation: changes in currency value from data

• Exchange rate changes affect inflation, growth, unemployment, current account balance, and living standards

• Diagram: AD/AS showing possible macroeconomic consequences of exchange rate changes

• Fixed exchange rates can involve devaluation and revaluation

• Governments and central banks maintain fixed rates through intervention

• Diagram: how a fixed exchange rate is maintained

• Managed exchange rates can become overvalued or undervalued

• Diagram: exchange rate determination and changes in equilibrium in a managed exchange rate system

• HL evaluation compares advantages and disadvantages of fixed and floating exchange rate systems

• Evaluation considers stability, flexibility, policy independence, and external balance