You are viewing a free preview of this lesson.
Subscribe to unlock all 10 lessons in this course and every other course on LearningBro.
The exchange rate is the price of one currency in terms of another. Exchange rate systems determine how this price is set — whether by market forces, government intervention, or a combination of both. This lesson examines the three main exchange rate systems, evaluates their advantages and disadvantages, and introduces the Marshall-Lerner condition and the J-curve effect.
Key Definition: The exchange rate is the rate at which one currency can be exchanged for another. For example, if £1 = $1.25, then one pound sterling buys 1.25 US dollars.
A rise in the exchange rate (appreciation/revaluation) means the currency becomes more expensive — each unit buys more foreign currency. A fall in the exchange rate (depreciation/devaluation) means the currency becomes cheaper.
| Term | Meaning | Context |
|---|---|---|
| Appreciation | Currency rises in value | Floating exchange rate |
| Depreciation | Currency falls in value | Floating exchange rate |
| Revaluation | Government raises the fixed rate | Fixed exchange rate |
| Devaluation | Government lowers the fixed rate | Fixed exchange rate |
Subscribe to continue reading
Get full access to this lesson and all 10 lessons in this course.