ECON102 Lecture Notes - Lecture 10: The Foreign Exchange, Economic Equilibrium, Demand Curve

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raspberrygnu289

8 Sep 2016

School

University of Waterloo

Department

Economics

Course

ECON102

Professor

Maryann Vaughan

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ECON102 Full Course Notes

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Foreign currency : foreign bank notes, coins and bank deposits. Foreign exchange market: market when currency of one country is exchanged for another. The price at which one currency exchanges for another is called a foreign exchange rate. Like all prices, an exchange rate is determined in a market the foreign exchange market. The canadian dollar is demanded and supplied by thousands of traders every hour of every day. With many traders and no restrictions, the foreign exchange market is a competitive market. When people who are holding one money want to exchange it for. Canadian dollars, they demand canadian dollars and they supply that other cou(cid:374)try"s (cid:373)o(cid:374)ey. So the factors that influence the demand for canadian dollars also influence the supply of canadian dollars, e. u. euros, u. k. pounds, and. A(cid:374)d the factors that i(cid:374)flue(cid:374)ce the de(cid:373)a(cid:374)d for a(cid:374)other cou(cid:374)try"s (cid:373)o(cid:374)ey also influence the supply of canadian dollars.

Related Questions

Just as with the price of a good, the price, or exchange rate, of a currency is determined by supply and demand. However, rather than using a traditional supply and demand analysis as shown in Marthinsen, currency traders often consider whether foreign funds will flow into or out of a country as a result of a particular economic circumstance. If foreigners wish to make domestic purchases or investments, the foreign currency must first be exchanged for the domestic currency. Thus, foreign funds flowing into a country increase the demand for the domestic currency and it appreciates. Funds flowing out reverse this process leading to depreciation of the domestic currency. In the table, place an X to indicate whether each economic condition will cause foreign funds to flow in or out of the country and whether the domestic currency will appreciate or depreciate.

Domestic circumstance	Funds flow in	Funds flow out	Currency appreciates	Currency depreciates
Real interest rates are higher than in other countries
Risk of civil war
Business taxes are raised above the world average				X
Expected stock market returns are better than elsewhere
Inflation increases
A large deposit of rare earth minerals is discovered
Rapidly growing manufacturing sector imports more foreign raw materials

ultramarinepug302

Answer the following questions. Each sub-part of the question is not related to the other part. Be sure to provide a written explanation in order to receive full credit. a) The foreign exchange market is in equilibrium, and there is a change in the consumption preference such that Canadian households decide to buy fewer American goods. If the Bank of Canada (BOC) wants to keep the exchange rate from changing, what should it do? What happens to the stock of official reserves held by the BOC? What happens to the balance of payments after the intervention by the BOC? Explain. (10 points)

b) Suppose you are a currency trader, and he observes the following exchange rates in the spot market: SÂ£/US$ = 0.5133 SUS$/â¬ = 1.4568 SÂ£/â¬ = 0.7192 ? You observe there is an arbitrage opportunity in trading Â£ and â¬, what should you do to capture the arbitrage profit? What is your arbitrage profit (measured in Â£)? Explain. (6 points) ? Also, discuss the adjustment mechanism (i.e., explain how the transactions you would eliminate the arbitrage profit). (9 points)

jadeotter670

Just as with the price of a good, the price, or exchange rate, of a currency is determined by supply and demand. However, rather than using a traditional supply and demand analysis as shown in Marthinsen, currency traders often consider whether foreign funds will flow into or out of a country as a result of a particular economic circumstance. If foreigners wish to make domestic purchases or investments, foreign currency must first be exchanged for the domestic currency. Thus, foreign funds flowing into a country increase the demand for the domestic currency and it appreciates. Funds flowing out reverse this process leading to depreciation of the domestic currency. In the table, place an X to indicate whether each economic condition will cause foreign funds to flow in or out of the country and whether the domestic currency will appreciate or depreciate.

Domestic circumstance	Funds flow in	Funds flow out	Currency appreciates	Currency depreciates
Real interest rates are higher than in other countries
Risk of civil war
Business taxes are raised above world average
Expected stock market returns are better than elsewhere
Inflation increases
A large deposit of rare earth minerals is discovered
Rapidly growing manufacturing sector imports more foreign raw materials
World commodity prices (such as oil or grain) fall in a country that is a major commodity exporter
GDP increases
PI falls

orchidmosquito970

ECON102 Lecture Notes - Lecture 10: The Foreign Exchange, Economic Equilibrium, Demand Curve

ECON102 Full Course Notes

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