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  • Created by: Simran
  • Created on: 26-02-14 20:47


Bilateral exchange rate: the exchange of one currency against another

Effective exchange rate: the exchange rate of one currency against a basket of currencies of countries, often weighted according to the amount of trade done with each country 

  •  Bilateral exchange rates show greater fluctuations than measures of effective exchange reates                                  CAUSES OF EXCHANGE RATE FLUCTUATIONS
  • exchange rate fluctuations are brought about by changes in the demand and supply of that currency 
  •  long term changes in the demand and supply: is caused by changes in the value of exports, imports and long term capital transactions 
  • These 3 factors are influenced by the 5 economic fundamentals:
  • 1- rate of inflation 
  • 2- interest rate 
  • 3- rate of economic growth 
  • 4- labour productivity
  • 5- measures of international competitiveness generally 
  • These 5 fundamentals show that the ER gradually moves towards its equillibrium which is PPP( the exchange rate that equalises the basket of identically traded goods and services within a country. It is an attempt to measure the value of a currency in terms of the amount of goods and services it will buy)
  • Short term changes in the demand and supply of a currency is caused by speculation 
  • speculators react…


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