EXCHANGE RATE The price at which one currency can be exchanged/traded for another

1.Who and what affects currency rate? qvrRRTBYAk

TERMS TO BE EXPLAINED..... Purchasing power parity Convertibility Pegged currency

Purchasing power parity (PPP) A rate of exchange calculated for two currencies so that the amount paid for a range of goods and services in both countries is the same

Convertible currency = money of one country that can easily be changed into the money of another country, especially into a strong currency (the dollar, the euro, the pound, the yen)

Pegged currencies to peg = to fix against something (gold, another currency) soft currencies (kuna, pesos…) must be pegged to hard currencies

EXCHANGE RATE SYSTEMS 1.The gold standard 2. Freely floating exchange rates 3. Managed exchange rates

1. THE GOLD STANDARD  the Bretton Woods agreement, 1944  most major currencies were fixed against the US dollar  fixed exchange rates defined in terms of gold and the US dollar  currencies could only be adjusted by the IMF (devalued/revalued)  abandoned in 1971 (inflation - not enough gold to guarantee its currency)

2. FLOATING EXCHANGE RATES (plutajući tečaj)  determined by supply and demand (it is worth whatever buyers are willing to pay for it)  Supply and demand is caused by foreign investment, import/export ratios, inflation and other economic factors  The floating exchange rates show the strength of a country’s economy (the more valuable a currency is, the stronger that country’s economy)  This balance is sometimes upset by speculators who buy and sell currencies to make a profit  A country’s central bank can intervene in the foreign exchange market (or forex) to correct short-term fluctuations in the value of its currency by buying or selling it

3. MANAGED EXCHANGE RATES (fiksni tečaj)  the exchange rate is determined and maintained by the government  governments and central banks influence the value level of their currencies when necessary  governments buy or sell in order to increase (revalue) or decrease (devalue) the value of their currencies

Floating or managed exchange rate system? To depreciate To appreciate To revalue To devalue

MacKenzie,, UNIT 26 p

ADD APPROPRIATE WORDS TO THESE SENTENCES: revaluation, floating, managed, speculators, convertibility, peg, central 1.Gold ________________ ended in the early 1970s. 2.In fact we have ___________ floating exchange rates, because governments and __________banks sometimes intervene on currency markets. 3.Another verb for fixing exchange rates against something else is to ________ them. 4.Increasing the value of an otherwise fixed exchange rate is called ___________________. 5.A currency can appreciate if lots _______________ buy it. 6.In most western countries there is a system of ___________exchange rates determined by supply and demand.

1.Gold convertibility ended in the early 1970s. 2.In fact we have managed floating exchange rates, because governments and central banks sometimes intervene on currency markets. 3.Another verb for fixing exchange rates against something else is to peg them. 4.Increasing the value of an otherwise fixed exchange rate is called revaluation. 5.A currency can appreciate if lots speculators buy it. 6.In most western countries there is a system of floating exchange rates determined by supply and demand.