EC140 Lecture Notes - Lecture 22: Fixed Exchange-Rate System, Canadian Dollar, Reserve Currency

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turquoiseraven338

6 Apr 2016

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International transactions in assets (bonds ,shares ,companies , real estate, factories) Canadian buys a foreign asset a debit in the capital account (negative) Foreigner buys canadian asset a credit in the capital account (positive) Official financing account changes in official foreign reserves (negative) Appreciation increase in the value of a currency: prices go down appreciation. Depreciation decrease in the value of a currency: prices go up depreciation. Similar to supply and demand for any product. Focus on the supply/ demand for foreign currency (not cdn dollars) Price is then the canadian dollar exchange rate. Remember increases in the exchange rate correspond to depreciations in the. Purchases of canadian exports or assets: buying in canadian dollars requires selling foreign currency. Banks holding canadian dollars as a reserve currency. Supply curve slopes upward when cdn. Dollar depreciates, exports increase and purchases of canadian assets increase. Reciprocal of the supply of foreign exchange.

Related Questions

In the short run, a tighter monetary policy by the U.S. Federal Reserve leads to:

Select one:

a. an increase in the supply of dollars and a dollar depreciation.

b. a decrease in the supply of dollars and a dollar appreciation.

c. an increase in the demand for dollars and a dollar depreciation.

d. a decrease in the demand for dollars and a dollar appreciation.

Which theorem states that exchange rates will adjust until the prices of goods in different countries approximate one another?

Select one:

a. purchasing power parity

b. the law of multiple prices

c. the principle of comparative advantage

d. dollarization

A country's balance of trade is the difference between its:

Select one:

a. nominal and real exchange rates.

b. monetary and fiscal policy.

c. exports and imports.

d. capital inflow and capital outflow.

When a foreign business buys stock in a U.S. company, the U.S. capital account will:

Select one:

a. move in a positive direction.

b. move in a negative direction.

c. remain unchanged.

d. become more volatile.

Saying that the United States is running a large current account deficit is equivalent to saying that:

Select one:

a. exports exceed imports in the United States.

b. the United States is running a large capital account surplus.

c. the balance of payments is negative.

d. the value of the current capital stock in the United States exceeds the value of future capital flows.

10-

An increase in the demand for a country's exports will have what effect on its currency?

Select one:

a. Its value will not change.

b. Its value will increase.

c. Its value will decrease.

d. Its value will depreciate.

11-

When the United States has a current account deficit, the U.S. capital account:

Select one:

a. will have a deficit also.

b. will be balanced.

c. will have a surplus.

d. must be falling.

12-

Which of the following is NOT a way that a country can finance a trade deficit?

Select one:

a. increased borrowing

b. sale of assets

c. decreased exports

d. reduction in cash reserves

13-

A trade deficit occurs when the value of a country's:

Select one:

a. imports exceeds the value of its exports.

b. exports exceeds the value of its imports.

c. inflow of foreign capital exceeds the outflow of domestic capital.

d. outflow of domestic capital exceeds its inflow of foreign capital.

14-

Which of the following is a U.S. current account transaction?

Select one:

a. Selling a computer chip to a resident in Europe.

b. Buying stock shares of a Canadian company.

c. Selling U.S. dollars in exchange for euros.

d. A foreign investor's purchase of a manufacturing plant in the United States.

15-

An exchange rate is:

Select one:

a. a yearly summary of all the economic transactions between residents of one country and residents of the rest of the world.

b. the sum of the balance of trade, net income on capital held abroad, and net transfer payments.

c. the price of one currency in terms of another currency.

d. a currency whose value is not pegged but governments will intervene extensively in the market to keep the value within a certain range.

amethysthedgehog627

6) Which of the following would be the most pessimistic with regard to the ability of the government to reduce unemployment by monetary of fiscal policy? a. Monetarists b. Keynesians c. rational expectations school d. Klingons e. supply-siders

7) Which of the following would tend to increase a country's imports?

a. an increase in the domestic rate of interest

b. an increase in the exchange rate ( i.e an increase in the price of foreign exchange)

c. an increase in domestic income

d. an increase in foreign prices

e. none of the above

8) Which of the following would decrease a country's exports ?

a. a decrease in the exchange rate( i.e a an decrease in the price of foreign exchange)

b. an increase in the domestic rate of interest

c. an increase in domestic price

d. an increase in domestic income

e. none of the above

9) Which of the following would indicate a conflict between the goals of full employment and balance of payments equilibrium ?

a. inflation and a balance of payments deficit

b. unemployment and a balance of payments surplus

c. unemployment and a balance of payments deficit

d. full employment and a balance of payments surplus

e. none of the above would indicate a conflict

10) Which of the following would result if the county's currency depreciated ? a. an increase in both imports and exports

b. a decrease in both imports and exports

c. an increase in imports and a decrease in exports

d. a decrease in imports and an increase in exports

e. a decrease in net capital inflows

11) Under the gold standard, if a nation had a balance of payments surplus, the difference would have been resolved by:

a. gold shipments from the surplus to the deficit country

b.gold shipments from the deficit to the surplus country

c. appreciation of the country's currency in the foreign exchange markets

d. depreciation of the country's currency in the foreign exchange markets

e. human sacrifices in the deficit country

12.Under a system of flexible exchange rates, if a nation had a balance of payments deficit, which of the following would occur ?

a. gold shipment from the surplus to the deficit country

b. gold shipments from the deficit to the surplus country

c. appreciation of the current in the foreign exchange markets

d. depreciation of the currency in the foreign exchange markets

e. the money supply increase

13. Depreciation of a country's currency would generally result in:

a. the aggregate demand curve shifting to the left

b. the aggregate demand curve shifting to the right

c. the aggregate supply curve shifting to the left

d. the aggregate supply curve shifting to the right.

e) both A and B

salmonbutterfly872

Assume that the U.S. dollar and the Japanese yen are the only two currencies in the world.

a. A bilateral nominal exchange rate S is the spot (now) exchange value of one currency in terms of the other and S can be written as dollars per 1 yen or yen per 1 dollar. If S = yen/1 dollar = 76.92 then the inverse 1/S gives dollars per 1 yen where 1/S = 1/(yen/1 dollar) = 1/76.92 = .013. If the 1/S increases to .014, has the dollar appreciated (1 dollar is worth more yen) or depreciated (1 dollar is worth less yen)? Explain.

b. Changes in demand and supply in the foreign exchange (FX) market determine the value of floating exchange rates S. If S is expressed as S = yen/1 dollar, then we have the FX market in terms of the demand and supply of dollars. (If S = dollars/1 yen, then we get the FX market in terms of the demand and supply of yen. Note also that no matter which currency the FX market is expressed, it is still an FX market where dollars are exchanged for yen. This means that an upward-sloping supply of dollars curve is exactly the same as a demand for yen curve and a downward-sloping demand for dollars curve is exactly the same as a supply of yen curve). Using S = yen/1 dollar and the FX market in terms of the demand and supply of dollars, an increase in S (dollar appreciation) leads to an increase in the number of dollars supplied (increase in the quantity of yen demanded). For dollar demand (or the supply of yen), an increase in S (dollar appreciation) leads to a decrease in the number of dollars demanded (or an increase in the number of yen supplied). The dollar demand curve shifts to the right if more yen are offered for dollars at any exchange rate S. An increase in dollar demand is caused mostly by private sector transactions in the current and capital accounts. Either an increase in demand for U.S. goods (merchandise trade in the current account) or an increase in demand for U.S. stocks and bonds (capital account inflows) will shift the dollar demand curve to the right. If private transactions in the current and capital accounts also cause shifts in the dollar supply curve, what are the corresponding factors that would lead to an increase in dollars supplied (yen demanded) at any exchange rate S?

brownhorse801

EC140 Lecture Notes - Lecture 22: Fixed Exchange-Rate System, Canadian Dollar, Reserve Currency

EC140 Full Course Notes

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