A rise in a currency's value relative to other currencies, often described as strengthening, is what economists call appreciation.
Missing Word
appreciation
Appreciation means a currency buys more of other currencies than before. It helps a country's tourists abroad and buyers of imports while hurting its exporters.
Category: Appreciation and Depreciation
Question 2
When market forces cause a currency to lose value against others, which news reports call weakening, economists call it depreciation.
Missing Word
depreciation
Depreciation means a currency buys less of other currencies than before. It makes a country's exports cheaper abroad and its imports more expensive at home.
Category: Appreciation and Depreciation
Question 3
Paying a fee for a contract that locks in a future exchange rate, to protect against currency risk, is called hedging.
Missing Word
hedging
Hedging uses a financial transaction to guard against risk. A firm that will be paid in a foreign currency later can hedge so that a fall in that currency does not wipe out its profit.
Category: Foreign Exchange Basics
Question 4
Buying a currency now in the hope of selling it later at a higher value is called speculation.
Missing Word
speculation
Speculation is betting on future price changes. Much portfolio investment in currencies is speculative, and it can lose money if the exchange rate moves the other way.
Category: Foreign Exchange Basics
Question 5
When foreign investors want to buy U.S. government bonds, they must first obtain dollars, which raises the demand for dollars.
Missing Word
demand
Demand for a currency comes from anyone who needs it to buy that country's goods, services or assets. Foreign purchases of U.S. bonds therefore increase the demand for dollars.
Category: Foreign Exchange Basics
Question 6
A Chinese firm that earns U.S. dollars selling goods in the United States and converts them into yuan adds to the supply of dollars.
Missing Word
supply
Supply of a currency comes from people who hold it and want another currency. The Chinese firm gives up dollars to get yuan, so it supplies dollars and demands yuan.
Category: Foreign Exchange Basics
Question 7
Firms that produce goods at home and sell them to buyers in other countries are called exporters.
Missing Word
exporters
Exporters pay costs in their home currency but earn revenue in foreign currency, so a stronger home currency squeezes their profits and a weaker one raises them.
Category: Appreciation and Depreciation
Question 8
Goods and services that Americans buy from producers in other countries are counted as U.S. imports.
Missing Word
imports
Imports are purchases from foreign producers. A stronger dollar makes them cheaper for Americans, so the model predicts imports rise when the dollar strengthens.
Category: Macroeconomic Effects
Question 9
Relatively high inflation in a country erodes what its money can buy, so the model predicts its currency will lose value.
Missing Word
inflation
Inflation reduces a currency's purchasing power, so demand for the currency falls and supply rises in the foreign exchange market. The currency of a high-inflation country therefore tends to depreciate.
Category: Shifts in Currency Markets
Question 10
When market forces alone set a currency's value, without the central bank stepping in, the currency is said to float.
Missing Word
float
A floating currency's exchange rate is set by demand and supply in the foreign exchange market. The U.S. dollar floats, which leaves the Fed free to aim monetary policy at domestic goals.
Category: Exchange Rate Policies
Question 11
A central bank that promises to hold its currency at a set value against the U.S. dollar is maintaining a peg.
Missing Word
peg
A peg ties a currency to another currency at a chosen rate. A hard peg holds the rate fixed at all times, while a soft peg lets the market set the rate except during sharp moves.
Category: Exchange Rate Policies
Question 12
When a central bank buys or sells currencies to push its exchange rate toward a target, the action is called intervention.
Missing Word
intervention
Intervention is the central bank acting directly in the foreign exchange market. To prop up its currency it buys its own currency with foreign currency; to hold it down it sells its own currency.
Category: Exchange Rate Policies
Question 13
A central bank's stock of foreign currencies, which it can spend to buy its own currency when defending a fixed exchange rate, is called its reserves.
Missing Word
reserves
Foreign exchange reserves are holdings of other countries' currencies, such as U.S. dollars. Defending a hard peg can require large reserves, and selling them works only until they run out.
Category: Exchange Rate Policies
Question 14
Countries such as France, Germany and Italy share a single currency called the euro.
Missing Word
euro
The euro is a merged currency used by many European nations. Its members face no exchange rate risk with one another but give up independent monetary policy to the European Central Bank.
Category: Exchange Rate Policies
Question 15
Economist James Tobin proposed taxing international flows of financial capital to reduce exchange rate swings.
Missing Word
Tobin
A Tobin tax, named for James Tobin, would put a small tax on international flows of financial capital, especially short-term ones, to discourage speculative swings. Such taxes are hard to enforce and may discourage useful foreign investment.
Category: Exchange Rate Policies