Fill in the blank: A fixed exchange rate system provides ___ and ___ in currency values.

Stability and predictability

How does currency depreciation affect a country's exports and imports?

Currency depreciation impacts trade dynamics.

• Exports become cheaper abroad.

• Imports cost more for locals.

• May boost export volume significantly.

True or False: Currency appreciation benefits exporters by increasing the amount of domestic currency they receive for their goods sold abroad.

False. Currency appreciation makes exports more expensive, potentially reducing the amount of domestic currency received.

What role do commercial banks play in the foreign exchange market?

Commercial banks influence currency trading.

• Execute client orders effectively.

• Engage in profit-driven trading.

• Speculate on currency value changes.

Fill in the blank: The nominal exchange rate is determined by the ___ and ___ for foreign exchange.

Supply and demand

How do exchange rate fluctuations impact the inflation rate in a country?

Exchange rate fluctuations raise inflation.

• Higher import prices impact consumers.

• Depreciation boosts demand for local goods.

• Domestic price increases may follow.

What is the impact of currency appreciation on a country's current account balance?

Currency appreciation can worsen the current account balance by increasing imports and decreasing exports, leading to larger trade deficits.

True or False: Devaluation is an intentional decrease in a currency's value set by market forces.

False. Devaluation is an intentional decrease set by the government, while depreciation occurs due to market forces.

Explain how fluctuations in exchange rates can complicate financial forecasting for companies.

Fluctuations complicate financial forecasting.

• They create revenue uncertainty.

• Costs become less predictable.

• Larger reserves needed for hedging.

Fill in the blank: In a floating exchange rate system, if the demand for foreign currency increases, the domestic currency will ___ against it.

Depreciate

What factors influence the supply of foreign currency in a domestic market?

Supply influenced by various factors.

• Exports increase currency supply.

• Investment income affects balance.

• Foreign investments boost supply.