IB Economics 4.5 Exchange Rates Key Definitions

Appreciation is the increase in the value of a currency.

Cyclical unemployment occurs during economic downturns when demand for goods and services falls, leading to job losses.

Depreciation is the decrease in the value of a currency.

A deliberate decrease in the value of a currency by the government or central bank within a fixed exchange rate system. It is the fixed-rate counterpart of a depreciation, which happens through the market under a float.

An exchange rate is the value of one currency in terms of another currency.

System where the central bank maintains the currency’s value at a predetermined level rather than letting market forces decide it.

A floating exchange rate is a system in which the value of a currency is determined by supply and demand, without government intervention.

System where the exchange rate is mainly determined by market forces, but the central bank occasionally intervenes to keep it close to a desired level.

Where the value of a currency is kept higher than its equilibrium level by government or central bank intervention.

Pegging currency means the central bank sets and maintains the value of the domestic currency relative to another currency.

A deliberate increase in the value of a currency by the government or central bank within a fixed exchange rate system. It is the fixed-rate counterpart of an appreciation, which happens through the market under a float.

The total output produced in an economy at all possible price levels, when the costs of factors of production are fixed, ceteris paribus.

Situation where the currency’s value is kept lower than its equilibrium level, making exports cheaper and imports more expensive.