Key Terms
Appreciating (strengthening)
Currency buys MORE of other currencies.
Depreciating (weakening)
Currency buys LESS of other currencies.
Result
High relative inflation causes currency depreciation.
Reverse
Lower relative interest rates lead to capital outflows and currency depreciation.
Arbitrage
Buying and selling goods or currencies across borders to exploit price differences; forces prices toward parity over tim
Stronger dollar is good for
Importers, U.S. tourists abroad, foreign investors in the U.S.
What is unambiguously good for the economy
Stability. When exchange rates are predictable, businesses can plan, price, and invest without guessing what their reven
Appreciating
Currency buys more of other currencies; also called strengthening.
Depreciating
Currency buys less of other currencies; also called weakening.
Purchasing power parity (PPP)
The exchange rate that equalizes prices of internationally traded goods across countries; used for GDP comparisons and a
Exchange rate
The price of one currency expressed in terms of another currency; determined by supply and demand in the foreign exchang