Exchange Rates GapFill

Exchange rates represent the value of one currency relative to another. There are three primary exchange rate systems to distinguish between.

The first is a  fiscalmonetaryfixedfloating exchange rate system. In this system, the levels of supply and demand for a currency determine its relative value. Under this system, when the value of the currency increases relative to another currency, it is known as  appreciationlowhighdepreciation. When it decreases relative to another currency, it is known as  depreciationappreciationlowhigh. Most of the developed world, including the UK, uses this system.

The second is a  fiscalmonetaryfloatingfixed exchange rate system.  In this system, the currency remains the same value relative to another currency over time, regardless of market developments. This is known as  peggingmanagingfixingfloating. A country's monetary authority, usually its central bank, can decide to increase the value of the currency, known as  highrevaluationlowdevaluation, or decrease its value, known as  devaluationrevaluationlowhigh. This decision will usually be made after consultation with other countries and/or the International Monetary Fund (IMF). Much of the developed world, including the UK, used to operate this system until the 1970s. It is still used by prospective applicants to the eurozone, in order to stabilise their local currency relative to the euro.

The third is a  fiscalmanagedmonetaryfloating exchange rate system. In this system a country's central bank will sell its own currency, buy other currencies, or adjust interest rates, in order to influence the rate of exchange. Since 2005, China has operated this system by purchasing large reserves of US dollars. This has meant the value of its currency has remained low relative to dollars, and thus kept the price of its exports  appreciatedlowdepreciatedhigh.