Textbook Notes (280,000)
CA (160,000)
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ECN 204 (200)
Chapter 13

ECN 204 Chapter Notes - Chapter 13: Foreign Exchange Market, Foreign Exchange Controls, Devaluation


Department
Economics
Course Code
ECN 204
Professor
Thomas Barbiero
Chapter
13

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Week 13 – CECN 204 – Exchange rate
Exchange rate (ER): price of 1 currency in terms of another price of foreign currency – depends
on demand for USD and supply of USD
Demand for our dollar
1. Imports of goods and services
2. Canadian investments abroad
3. Speculation
Supply us with their dollar
1. Export of goods and services
2. Foreign investment in Canada
3. Speculation
Foreign currency market
- As we go up the Y axis, price of US$  and CND  (depreciating)
- As we go down the Y axis, price of US$ and CND  (appreciating)
Fluctuations in demand and supply will eventually reach a equilibrium
Changes in the exchange rate
1. Relative change in tastes and preferences
a. Canadians prefer American products
- dd for US$ increased = P of US$ 
- value of Cnd  = p of cnd  (depreciates)
b. Americans prefer Canadian products
- ss for US$ increase = p of US$ 
- value of cnd  = p of cnd 
2. relative rate of growth of GDP
a. Canada has a higher rate of growth
b. US has a higher rate of growth
3. Relative inflation rate
a. Canada has a higher rate of interest rates
b. US has a higher inflation rate
4. Relative interest rate
a. US has a higher interest rates
b. Canada had a higher interest rates
Floating/ flexible ER systems
- ER goes  and  if there are changes in demand/ supply
- Adv: automatic adjustment
- Disadv: uncertainties
Pegged/fixed ER system
- ER fixed and no changes with dd/ss
- Adv: no uncertainties
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