Apr 19, 2016

Finance English practice: Unit 44 — Exchange Rates

16 cards
, 71 answers
  • Complete the sentences below. Use the key words if necessary.
    • Why exchange rates change

      key words
      exchange rate      ○      purchasing power parity      ○      depreciate      ○      currency speculation      ○      appreciates      ○      speculative


      An is the price at which one currency can be exchanged for another (e.g. how many yen are needed to buy a euro). In theory, exchange rates should be at the level that gives (PPP). This means that the cost of a given selection of goods and services (e.g. a loaf of bread, a kilowatt of electricity) would be the same in different countries. So if the price level in a country increases because of inflation, its currency should — its exchange rate should go down in order to return to PPP. For example, if inflation increases in the US, the dollar exchange rate should go down so that it takes more dollars to buy the same products in other countries.

      In fact, PPP does not work, as exchange rates can change due to — buying currencies in the hope of making a profit. Financial institutions, companies and rich individuals all buy currencies, looking for high interest rates or short-term capital gains if a currency increases in value or . This means exchange rates change due to speculation rather than PPP. Over 95% of the world’s currency transactions are purely , and not related to trade. Banks and currency traders make considerable profits from the spread between a currency’s buying and selling prices.

      Fixed and floating rates

      key words
      fixed      ○      pegged against      ○      gold convertibility      ○      floating exchange rates      ○      freely floating exchange rate      ○      market forces      ○      common currency


      For 25 years after World War II, the levels of most major currencies were determined by governments. They were or the US dollar (e.g. from 1646–67, one pound was worth $2.28), and the dollar was pegged against gold. One dollar was worth one thirty-fifth of an ounce of gold, and US Federal Reserve guaranteed that they could exchange an ounce of gold for $35. This system was known as . These fixed exchange rates could only be adjusted if the International Monetary Fund agreed. Pegging against the dollar ended in 1971, because following inflation in the USA, the Federal Reserve did not have enough gold to guarantee the American currency.

      Since the early 1970, there has been a system of in most western countries. This means that exchange rates are determined by people buying and selling currencies in the foreign exchange markets. A means one which is determined by : the level of supply and demand. If there are more buyers of a currency than sellers, its price will rise; if there are more sellers, it will fall.

      Since the introduction of a in 2002, fluctuating exchange rates among many European countries are no longer a problem. But the euro continues to fluctuate against the US dollar, the Japanese yen and other currencies.

      Government intervention

      key words
      intervene      ○      exchange markets      ○      reserves      ○      managed


      Government and central banks sometimes try to change the value of their currency. They in , using foreign currency to buy their own currency — in order to raise its value — or selling to lower it. The resulting rates are known as floating exchange rates. But speculators generally have a lot more money than a government gas in its reserves of foreign currency, so central banks or government only have limited power to influence exchange rates.

    • Are the following statements true or false?
      • 1. Purchasing power parity is a theory that doesn’t apply in reality. clue
        — In theory, exchange rates should be at the level that gives purchasing power parity. In fact, PPP does not work.
        • true
        • false

      • 2. Inflation should lead to an increase in the value of a country’s currency. clue
        — If the price level in a country increases because of inflation, its currency should depreciate.
        • true
        • false

      • 3. Speculators buy currencies when they expect their value to increase. clue
        — Financial institutions, companies and rich individuals all buy currencies, looking for short-term capital gains if a currency gains in value.
        • false
        • true

      • 4. Speculators generally sell currencies if their interest rate rises. clue
        — Currency speculation is buying currencies in the hope of making a profit looking for high interest rates.
        • true
        • false

      • 5. Currency traders offer different buying and selling prices. clue
        — Currency traders make considerable profits from the spread between a currency’s buying and selling prices.
        • true
        • false

      • 6. A lot more currency is exchanged for buying or selling goods than for speculation. clue
        — Over 95% of the world’s currency transactions are purely speculative, and not related to trade.
        • false
        • true

      • 7. The Federal Reserve will no longer exchange US dollars for gold. clue
        — Gold convertibility ended in 1971, because the Federal Reserve did not have enough gold to guarantee the American currency.
        • true
        • false

      • 8. Most exchange rates used to be fixed; now they float. clue
        — For 25 years after World War II, the levels of most major currencies were fixed. Since the early 1970s, there has been a system of floating exchange rates in most western countries.
        • true
        • false

      • 9. If more people want to buy a currency than sell it, its price will go down. clue
        — If there are more buyers of a currency than sellers, its price will rise, if there are more sellers, it will fall.
        • false
        • true

    • Complete the newspaper headlines with the correct forms of words.
      • US inflation will cause dollar to  . . . 
        depreciate
        , economists warn
        • speculation
        • converting
        • speculators
        • depreciate
        • appreciate
        • intervene

      • Top economists say currency undervalued, call for government to allow it to  . . . 
        appreciate
        5-10%
        • intervene
        • appreciate
        • converting
        • speculators
        • depreciate
        • speculation

      • Increasing currency  . . . 
        speculation
        is making exchange rates more volatile
        • speculators
        • appreciate
        • depreciate
        • speculation
        • converting
        • intervene

      • Common currency: Economic consultant says  . . . 
        converting
        pound to euro would cost British businesses £12bn
        • appreciate
        • speculators
        • converting
        • intervene
        • speculation
        • depreciate

      • Chinese experts say the  . . . 
        speculators
        betting on revaluation are threatening the economy
        • speculators
        • speculation
        • intervene
        • appreciate
        • converting
        • depreciate

      • Central bank not expected to  . . . 
        intervene
        in currency crisis
        • speculation
        • appreciate
        • speculators
        • intervene
        • depreciate
        • converting

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