Study Notes
Exchange rates are the value of one currency in terms of another, determined by supply and demand in the foreign exchange market. Factors like interest rates, currency speculation, and trade impact these rates.
- Exchange Rate — the price of one currency in terms of another. Example: USD$1 = MYR4.5 means you need 4.5 MYR to buy 1 USD.
- Currency Appreciation — a rise in the value of a currency against another. Example: USD1 = MYR5.5 in 2021 shows USD has appreciated.
- Currency Depreciation — a fall in the value of a currency against another. Example: USD1 = MYR3.5 in 2021 shows USD has depreciated.
- Currency Revaluation — government increases the exchange rate. Example: Government action makes the currency stronger.
- Currency Devaluation — government decreases the exchange rate. Example: Government action makes the currency weaker.
Exam Tips
Key Definitions to Remember
- Exchange Rate
- Currency Appreciation
- Currency Depreciation
- Currency Revaluation
- Currency Devaluation
Common Confusions
- Mixing up appreciation and depreciation
- Confusing revaluation with appreciation
Typical Exam Questions
- What is an exchange rate? The price of one currency in terms of another.
- How does currency appreciation affect exports? It raises export prices, reducing demand.
- What happens to import prices when a currency depreciates? Import prices rise as more local currency is needed.
What Examiners Usually Test
- Understanding of how exchange rates are determined
- Effects of currency appreciation and depreciation on trade
- The role of government in influencing exchange rates