currency

Examples of currency in the following topics:

• Introducing Exchange Rates

  • In finance, an exchange rate between two currencies is the rate at which one currency will be exchanged for another.
  • In finance, an exchange rate (also known as a foreign-exchange rate, forex rate, or rate) between two currencies is the rate at which one currency will be exchanged for another.
  • It is also regarded as the value of one country's currency in terms of another currency .
  • Most trades are to or from the local currency.
  • The buying rate is the rate at which money dealers will buy foreign currency, and the selling rate is the rate at which they will sell the currency.

• Exchange Rate Systems

  • One of the key economic decisions a nation must make is how it will value its currency in comparison to other currencies.
  • A currency that uses a floating exchange rate is known as a floating currency.
  • A fixed exchange rate system, or pegged exchange rate system, is a currency system in which governments try to maintain a currency value that is constant against a specific currency or good.
  • In a fixed exchange-rate system, a country's government decides the worth of its currency in terms of either a fixed weight of an asset, another currency, or a basket of other currencies.
  • Regimes also peg to other currencies.

• Real Versus Nominal Rates

  • For example, a currency can be measured in terms of other currencies, or it can be measured in terms of the goods and services it can buy.
  • An exchange rate between two currencies is defined as the rate at which one currency will be exchanged for another.
  • Therefore, changes in the nominal value of currency over time can happen because of a change in the value of the currency or because of the associated prices of the goods and services that the currency is used to buy.
  • The nominal rate is set on the open market and is based on how much of one currency another currency can buy.
  • Imagine there are two currencies, A and B.

• Fixed Exchange Rates

  • A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime where a currency's value is fixed against the value of another single currency, to a basket of other currencies, or to another measure of value, such as gold.
  • A fixed exchange rate is usually used to stabilize the value of a currency against the currency it is pegged to.
  • This is one reason governments maintain reserves of foreign currencies.
  • This places greater demand on the market and pushes up the price of the currency.
  • This method is rarely used because it is difficult to enforce and often leads to a black market in foreign currency.

• Managed Float

  • Almost all currencies are managed since central banks or governments intervene to influence the value of their currencies.
  • So when a country claims to have a floating currency, it most likely exists as a managed float.
  • For example, if a currency is valued above its range, the central bank will sell some of its currency it has in reserve.
  • By putting more of its currency in circulation, the central bank will decrease the currency's value.
  • If a currency floats, there could be rapid appreciation or depreciation of value.

• Finding an Equilibrium Exchange Rate

  • Countries have a vested interest in the exchange rate of their currency to their trading partner's currency because it affects trade flows.
  • When the domestic currency has a high value, its exports are expensive.
  • The asset market model views currencies as an important element in finding the equilibrium exchange rate.
  • The asset market model of exchange rate determination states that the exchange rate between two currencies represents the price that just balances the relative supplies of, and demand for, assets denominated in those currencies.
  • They include investments, such as shares of stock that is denominated in the currency, and debt denominated in the currency.

• Reason for a Zero Balance

  • Equilibrium in the market for a country's currency implies that the balance of payments is equal to zero.
  • The country's currency is supplied when it is used to purchase foreign currencies.
  • Imaging that we are analyzing Italy's economy and its currency transactions with the rest of the world.
  • Likewise, a country's currency is supplied when it is used to purchase currencies in the rest of the world.
  • This holds true when a country's currency market is in equilibrium and there are no external currency controls.

• The American Dollar and the World Economy

  • This system resulted in fixed exchange rates -- that is, each nation's currency could be exchanged for each other nation's currency at specified, unchanging rates.
  • If a country's currency was too high relative to the dollar, its central bank would sell its currency in exchange for dollars, driving down the value of its currency.
  • Conversely, if the value of a country's money was too low, the country would buy its own currency, thereby driving up the price.
  • Americans urged Germany and Japan, both of which had favorable payments balances, to appreciate their currencies.
  • Eventually, a country that intervenes to support its currency may deplete its international reserves, making it unable to continue buttressing the currency and potentially leaving it unable to meet its international obligations.

• Exchange Rate Policy Choices

  • Developing economies often have the majority of their liabilities denominated in other currencies instead of the local currency.
  • Businesses and banks in these types of economies earn their revenue in the local currency but have to convert it to another currency to pay their debts.
  • When a trade deficit occurs in an economy with a floating exchange rate, there will be increased demand for the foreign (rather than domestic) currency which will increase the price of the foreign currency in terms of the domestic currency.
  • This is because sudden depreciation in their currency value poses a significant threat to the stability of their economies.

• Measuring the Money Supply: M1

  • M1 captures the most liquid components of the money supply, including currency held by the public and checkable deposits in banks.
  • More specifically, M1 includes currency and all checkable deposits .
  • Currency refers to the coins and paper money in the hands of the public.
  • Near monies cannot be spent as readily as currency or checking account money, but they can be turned into spendable balances with very little effort or cost.
  • The M1 measure includes currency in the hands of the public and checkable deposits in commercial banks.