-The foreign exchange rate is the price of a currency in terms of another currency. It is the external value or price of a country’s currency.

S$1 – US$0.82/ US$1 –S$1.22; (1/0.82)

-An increase in value of one currency relative to another currency as a result of the increase in market demand for or the reduction in the supply of currency in the forex market. (rise in dd for local $/fall in ss of local S$)

-A decrease in value of one currency relative to another currency as  a result of the fall in the demand for or  the increase in the supply of the currency in the forex market. (rise in dd for local $/fall in ss of local S$)

-Automatic stabilization: The BOP and BOT (must satisfy the Marshal-Lerner Condition (PED of exports + PED of imports > 1)

-Efficient allocation of resources possible (exchange rate acts like a price mechanism) - Social optimization of resource allocation at global level - Maximisation of net social benefit gain (only feasible when perfect market condition exists for global market – many buyers and sellers)

-Freedom to pursue an independent domestic policy goals aimed at securing internal equilibrium - curb inflation – when government does not regulate exchange rate, the monetary policy can work independently to regulate internal aspect of the economy - can use MS to regulate interest rate

-There is no need for large official reserves to maintain the exchange rate (fall in Opp. cost of holding reserve) - more resource for other aspect of economic development

Pedx + Pedm > 1

-Capital inflow and outflow are constant – it will affect the price of export and import demand, therefore it affects trade pattern as the exchange rate will vary extensively

-Uncertainty –Discourages trade and investment – as trading price fluctuate will affect trading and investment activities

-Speculation

-Inflationary impact: Depreciation increases export demand creating demand pull inflation. Also, cost-push inflation because imported raw materials and essentials are more expensive.

-The flexible exchange rate system determines the exchange rate based on the demand and supply of currency in local or foreign currency in the foreign exchange market.

-State that the intersection of Dd & Ss of S$ in the forex market will determine exchange rate.

-State market forces of dd and ss of local currency in forex market are determined by expert dd and capital inflow for dd for S$ and import dd and capital outflow for SS of S$.

-State that the export dd and import dd are caused by the following factors:

-State the capital inflow and outflow are affected by the following factors:

-In this exchange rate system, the central banks occasionally enter foreign exchange markets to adjust their official holdings to moderate major swings in the exchange rates. The central bank may attempt to raise and lower exchange to influence the economic activities so as to achieve the economic aims of the government by directly increase the demand and supply of the local currency to influence the exchange rate.

-In the fixed exchange rate system, the government peg the exchange rate of the country to the currency value of another.

-Removes uncertainty and discourages speculation – encourage trade and investment - ascertaining trading price, the cost of production and imported resources will be stabilized

-No need for artificial trade restrictions – foreign exchange can be used to control price of imports and exports to affect trading activity – we need to use protectionism - can avoid the effects of protectionism

-Opportunity cost of having a large reserve - idle fund which can be used for economic development – need to keep US$ to ensure that the government can increase the demand for local $

-Speculation (in anticipation if the government switch to flexible system)

-A reluctance in reducing surplus/deficit (China’s surplus)

-Monetary Policy ineffective: Contractionary policy will attract FDI putting upward pressure on ER. Government has to sell domestic currency increasing money supply again - inflow of FDI - Foreigner will inject more fund into local money market - increase in local money supply - decrease in interest rate – fall in cost of mortgage loan – raise dd for loan – asset-based inflation

-Change in demand for local goods and services

-Change in relative interest rates between countries

-Expectation change in future value of domestic currency relative to foreign

-Change in return on capital investment

-Change in cost of production

-Change in taste and preference of foreign consumers

-Over-valuation refers to the condition where the exchange rate pegged by the government is above the market-determined exchange rate.

-Under-valuation refers to the condition where the exchange rate pegged by the government is below the market-determined exchange rate

-To reduce the uncertainty in trade

-To prevent speculative movements of “hot money”

-To correct BOP deficit/surplus

-To neutralize short run pressure on the exchange rate

-Impact of exchange rate

-Effect of balance of trade

-BOP Improvement (Surplus)

-Effects of local production and employment

-Effects of economic growth

-Effects on cost of living and standard of living

-Rise in import price and fall in export price/ Cost of FDI fall

-Fall in import demand, rise in export demand/ FDI increase (BOP)

-raise export demand -  rise in AD – rise in NY and fall in import demand - Potential Growth (Economic Growth)

-rise in AD, rise in production/ rise employment

-raise COL/ SOL fall (Price stability and SOL)

-Optimization of Resources

-Distribution of Y

Exchange rate is determined by settling the exchange rate based on an equivalent domestic purchasing based on the price level of the countries.  To prevent distortion of real per capita Y due to exchange rate fluctuation - use to convert real GDP per capita of different countries into a common denomination based on inflation rate

Foreign exchange rate of the currency (PPP) = Foreign price level / Local price level

-Exchange rate that is determined by using a basket of weighted selected currency

-Weightage of currency is determined by relative importance of the country’s trading and investment activities on the exchange rate

-NEER after taking into consideration the impact of the change in the relative prices on the external value of the currency

-It refers to the movement of capital in or out of a country due to certain factors like market and investor confidence

-It refers to money held by foreign investors that is liable to switch to another country’s currency within a short notice, so as to obtain highest returns.

-It refers to the buying or selling of a financial asset, so as to reap quick profit.

-The government can introduce capital control.

-It refers to the value of a currency in terms of another country’s currency. For instance, the value of 1 SingDollar to 1 USD, where how much USD can 1 SingDollar buy.

-It refers to a fixed exchange rate system that is occasionally re-regulated.

-It refers to the price and quantity level of a currency where the demand curve and supply curve of a currency intersects.

-In this exchange rate system, the central banks occasionally enter foreign exchange markets to adjust their official holdings to moderate major swings in the exchange rates. The central bank may attempt to raise and lower exchange to influence the economic activities so as to achieve the economic aims of the government by directly increase the demand and supply of the local currency to influence the exchange rate.

-In the fixed exchange rate system, the government peg the exchange rate of the country to the currency value of another.

Pedx + Pedm > 1

-It refers to the acquisition or retaining of capital assets in order to pursue wealth creation.

-It refers to the allocation of capital into financial assets in order to reap profitable returns.

-It refers to a form of government regulation to restrict the flow of capital in and out of the domestic economy.

-It refers to the measurement of inflation that excludes specific items that experience volatile price changes, such as private accommodations and transport costs.

-It refers to currency intervention by one or more financial institution in order to increase or decrease the value of a currency. For instance, China has been criticized by the US for currency manipulation.

-It refers to a steady and minimal strengthening of a currency. It is known that Singapore adopts such as stance.

-It refers to the sum of tradable currencies, gold reserves and other forms of funds that a country possesses.

-It refers to a particular loan that bank or mortgage lender offers an individual in order to finance the purchase of a real estate.

-It refers to an index of a currency’s value with respect to a basket of foreign currencies.

-It refers to a selected sum of currencies with different weightings that is used as a benchmark to measure regional currency movements.

-It refers to the value of money kept by individuals after a certain period of time with respect to the current time period.

-It refers to the total national income divided by the total population within a country.