Exchange rates

1 The distinction between fixed, managed and floating exchange rates.

2 Government intervention in currency markets through:

• foreign currency transactions • the use of interest rates • quantitative easing.

3 Factors influencing floating exchange rates:

• relative interest rates

• relative inflation rates (purchasing power parity theory)

• current account of the balance of payments

• strength of the economy

• capital flight

• expectations and speculation

• global factors, e.g. falls in commodity prices.

4 The distinction between revaluation and appreciation of a currency.

5 The distinction between devaluation and depreciation of a currency.

6 The impact of changes in exchange rates on:

• the current account of the balance of payments (with reference to Marshall-Lerner condition and to the J-curve effect)

• the capital and financial accounts of the balance of payments

• economic growth

• employment and unemployment • rate of inflation

• FDI flows.

7 Competitive depreciations/devaluations and their consequences

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