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Exchange Rates: Fixed, Flexible, and Managed Float quiz

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Terms in this set (15)

  • What determines the value of a currency in a floating exchange rate system?
    The value is determined by supply and demand in the foreign exchange market.
  • What is another name for a floating exchange rate system?
    It is also called a flexible exchange rate system.
  • How do exchange rates behave in a floating exchange rate system?
    Exchange rates change frequently based on shifts in supply and demand.
  • What is the equilibrium exchange rate?
    It is the rate at which the quantity of currency demanded equals the quantity supplied.
  • What happens to the equilibrium exchange rate if demand for a currency increases?
    The equilibrium exchange rate rises, meaning the currency becomes stronger.
  • What is a fixed exchange rate system?
    It is an agreement between countries to hold exchange rates constant.
  • How were exchange rates determined under the gold standard?
    Exchange rates were based on the amount of gold each country had.
  • Why was the gold standard abandoned?
    It was abandoned during the Great Depression as countries allowed their currencies to fluctuate.
  • What does it mean to 'peg' a currency?
    Pegging means fixing a currency's value to another currency, usually the US dollar.
  • Which country is a famous example of using a fixed exchange rate system?
    China is a well-known example, having pegged its currency to the US dollar for many years.
  • What is a managed float exchange rate system?
    It is a system where the government occasionally intervenes to stabilize the currency.
  • How does a managed float differ from a purely floating system?
    In a managed float, the government intervenes to prevent extreme fluctuations, unlike a purely floating system.
  • What actions might a government take in a managed float system?
    The government may buy or sell its own currency to influence supply and demand.
  • What is the main goal of government intervention in a managed float system?
    The goal is to keep the currency stable and prevent large irregularities.
  • Which exchange rate system is most commonly used by countries today?
    Most countries use a managed float system, allowing some flexibility with occasional government intervention.