Banks

Banks

The central bank is the center of the banking system, it control the banking system, and act as banker to commercial banks and the government.

The information is summed up in the mind map above.

Functions of Money

Functions of Money

Money is a medium of exchange that can also serve as a store of value, a unit of account, and the standard of deferred payment.

Exchange Rates

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As you know, there's are lots of topics to study for your IGCSE economics exams, and you may be really really stressed out about it, but don't worry, our class has created a blog to help you with your revision! In this post, I will teach you all the basic things you need to know about exchange rates.


So here goes...
Exchange rate is the value of one country's currency relative to that of another country's currency.

There are two ways to manage exchange rates: with a fixed exchange rate system or with a floating exchange rate system.

Fixed Exchange Rate

When there is a fixed exchange rate, the exchange rate is set by the government, and pegged (fixed and stabilized) to another country’s currency. Some developing countries use this system as their own economy is unstable.

The changes in the price of the currency in a fixed exchange rate are called:

Revaluation
– when the price of the currency pegged officially increases,

Devaluation
– when the price of the currency pegged officially decreases.

Floating Exchange Rate

When there is a floating exchange rate, the exchange rate is determined by the market forces (supply and demand). Developed countries with stable economies use this system as they respond to inflation and other economic factors too.

The changes in the value of the currency in a floating exchange rate are called:

Appreciation
– when the value of the currency rises compared to another country’s currency,

Depreciation
– when the value of the currency falls compared to another country’s currency.

On the foreign exchange market (FOREX), the demand and supply for a currency is determined by the demand and supply for its exports and foreign investment in that country. This is because when a country buys another country's exports, it has to change its currency to that of the exporting country.

There is also something called the managed float, or dirty float. This is when the government or the central bank intervenes, and influences the exchange rate by buying or selling currencies. This happens when the central bank tries to stabilize the currency after an economic shock before it can strongly damage the local economy.

In international trade of goods and services, the fluctuation of exchange rates between countries can greatly affect the demand and supply for traded goods and services. For example, if my exchange rate lowers, there will be an increase in demand for my exports. This is because, other countries now do not have to spend as much of their own currency to purchase the same amount of goods as before. Likewise, demand for imported goods in my countries will be lowered since I now have to pay more for the same amount of goods.

On the other hand, if the value of my currency increases, then I will be able to import more goods and services, but the demand for my exports will fall.

All these changes in demand and supply for imported or exported goods are reflective on how I have to change my currency to the currency of the country I am trading with- and vice versa.

The value of a currency fluctuates, and this may be due to:

- Change in the balance of trade:

The demand and supply of a currency depend on the country’s imports and exports.

- Change in interest rate:

If a country has a high interest rate, there will be more foreign investors, so the demand for its currency will increase and result in appreciation.

Similarly, if the country has a low interest rate, there will be less foreign investors, so the demand for its currency will decrease and result in depreciation.

- Change in inflation rate:

If a country has a high inflation rate, it will not be competitive internationally. There will be fewer exports and thus a fall in demand for its currency, which leads to depreciation, and vice versa.

Well, that's all you need to know for now! Not as hard as you thought it would be, huh? Good luck with your revision and don't forget to visit our other pages too!