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Terms
Terms
Terms
Appreciation:
a. An increase in the value of a currency against other currencies
under a Floating Exchange Rate System.
An appreciation of a currency’s value makes imports cheaper and
exports more expensive, thereby
encouraging additional imports and curbing exports and so
helping in the removal of a Balance of
Payments surplus and the excessive accumulation of international
reserves. How successful an
appreciation is in removing a payments surplus depends on the
reactions of export and import volumes to
the change in relative prices. If these values are low, trade volume
will not change very much and the
appreciation may in fact make the surplus larger. On the other
hand, if export and import demand is
elastic then the change in trade volumes will operate to remove
the surplus.
Bad Money Drives Out Good: The idea that an injection of low-
quality coinage into a monetary system
will dissuade holders of high-quality coins from parting with cash.
Before paper money (banknote) became
universally accepted as a means for settling debts, precious metals
were the most common forms of
money. Gold and silver coins were struck bearing a face value
equal to the value of the metal content.
Debasement of the coinage occurred when the face value of their
metal content went down as opposed to
their denominated worth. The holders of the correctly valued
coinage became unwilling to exchange for
the debased coinage because they would obtain less metal in
exchange than if they bought direct. The
result was that the ‘good’, undebased coinage did not circulate.
The process is referred to as Gresham’s
law.