Unit 44: Exchange rate

PART A

I. Matching

1. currency speculation

2. spread

3. exchange rate

4. inflation

5. purchasing power parity

A. the relation in value between one currency and another

B. a rate of exchange that is calculated for two currencies so that the amount
paid for a range of goods and services in both countries is the same:

C. the activity of buying currencies in the hope of making a profit when you
sell them, but with the risk of losing money

D. the difference between two rates or prices

E. a rise in the general prices of goods and services in a particular country over
a period of time, resulting in a fall in the value of money;

II. Questions

1. What is an exchange rate?

2. What happens when exchange rates are at the level that gives purchasing
power parity(PPP)?
 3. What is currency speculation?

4. What may happen if the price level in a country increases because of

inflation?

5. Why doesn’t PPP work in reality?

6. What makes exchange rates change?

7. How can banks and currency traders make big profits?

III. True/ False

8. It will take more dollars to buy a product if the dollar exchange rate goes up.

9. In reality, exchange rates should be at the level that gives purchasing power
parity.

10. Most of the world’s currency transactions are speculative.

PART B

I. True/ False

1. Many major currencies were fixed against the US dollars after World War II.

2. Many currencies are still pegged against the US dollar because the Federal
Reserve has enough gold to guarantee the American currency.
 3. Floating exchange rates have not been used in Western countries since the
1970s.

4. The introduction of euro in 2002 helps to solve the problem of floating

exchange rates among many European countries.

5. The euro stops fluctuating against many other currencies.

II. Questions

7. How much gold was a dollar worth?

8. Why did pegging against the US dollar end in 1971?

9. What is the floating exchange rate?

10.What is the freely floating exchange rate?

PART C

I. Questions

1. How does a government raise the value of its currency?

2. How does a government lower the value of its currency?

3. What are managed floating exchange rates ?

4. Who has more power to influence exchange rates, speculators or

governments? Why?