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Markets - Foreign exchange market
Theories
The foreign exchange market is a big one. The net daily turnover in London is over $650 billion. That's a lot of money! The exchange rate can also affect inflation (see the causes of inflation section for more detail on cost-push inflation). In fact, it has even been used as a target for monetary policy for a while. From all this we can see the importance of the foreign exchange market, and in this section we look in more detail at theories associated with the exchange rate.
- Exchange rates - what determines the rate at which sterling exchanges for other currencies?
- Fixed and floating rates - exchange rates can be fixed to another currency or free to find their own level in the market. What is the difference between these systems, and why might we choose one or the other?
- Market intervention - if they wanted to intervene to influence the level of the exchange rate, how would a central bank actually do it?
- Effects of exchange rate changes - if the exchange rate does change, what effects might this have on the rest of the economy?
- Exchange rate jargon - a jargon-busting guide to exchange rates. What are spot and forward rates? What is the effective exchange rate? What is meant by purchasing power parity (PPP)?
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