Economics 1022A/B Lecture Notes - Lecture 17: Foreign Exchange Market, Demand Curve, Canadian Dollar

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7 Mar 2020

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Economics 1022A/B Lecture Notes - Lecture 16: Nominal Interest Rate, Bank Reserves, Excess Reserves

Economics 1022A/B Lecture Notes - Lecture 17: Foreign Exchange Market, Demand Curve, Canadian Dollar

Economics 1022A/B Lecture Notes - Lecture 18: Foreign Exchange Market, Demand Curve, Interest Rate Parity

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To buy goods and services produced in another country we need money of that country. Foreign bank notes, coins, and bank deposits are called foreign currency. We get foreign currency in the foreign exchange market. We get foreign currency and foreigners get u. s dollars in the foreign exchange market. The foreign exchange market is the market in which the currency of one country is exchanged for the currency of another. The price at which one currency exchanges for another is called a foreign exchange rate. A fall in the value of one currency in terms of another currency is called currency depreciation. A rise in value of one currency in terms of another currency is called currency appreciation. An exchange rate is the price the price of one currency in terms of another. Like all prices, an exchange rate is determined in a market the foreign exchange market.

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Foreign exchange markets make it possible for trade to be enacted between countries without lengthy negotiations on trade terms. The exchange rate mechanism is a relatively stable process whereby different currencies can be exchanged in an orderly manner in conformity to the rules of currency exchange rates. Factors, such as the relative inflation and unemployment rates between the trading partners, affect the value of each country's currency in relation to the other countries' currency. The country with higher inflation and unemployment will have the lower valued currency.

(A.) Why is the foreign currency exchange market important to a business?

(B.) What is the benefit of the foreign currency exchange market to the U.S. company?

(C.) If the U.S. currency is decreasing versus other currencies of countries it trades with, how will that affect the U.S. company? If the reverse is true, how will that affect the US company?

orchiddonkey965

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

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

Economics 1022A/B Lecture Notes - Lecture 17: Foreign Exchange Market, Demand Curve, Canadian Dollar

Economics 1022A/B Lecture Notes - Lecture 16: Nominal Interest Rate, Bank Reserves, Excess Reserves

Economics 1022A/B Lecture Notes - Lecture 17: Foreign Exchange Market, Demand Curve, Canadian Dollar

Economics 1022A/B Lecture Notes - Lecture 18: Foreign Exchange Market, Demand Curve, Interest Rate Parity

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