Textbook Notes (369,035)
Canada (162,359)
Economics (818)
ECON 1100 (224)
Chapter 13

Chapter 13

3 Pages
136 Views
Unlock Document

Department
Economics
Course
ECON 1100
Professor
Eveline Adomait
Semester
Fall

Description
Chapter 13: Exchange Rates and the Open Economy Key Terms Nominal Exchange Rate: the rate at which two currencies can be traded for each other Parity: refers to the situation when one unit of one currency trades on the foreign exchange market for one unit of another currency; “par” Appreciation: an increase in the value of a currency relative to another currency Depreciation: a decrease in the value of a currency relative to another currency Flexible Exchange Rate: an exchange rate whose value is not officially fixed but varies according to the supply of and demand for the currency in the foreign exchange market Foreign Exchange Market: the market on which currencies of various nations are traded for one another Fixed Exchange Rate: an exchange rate whose value is set by official government policy Market Value Equilibrium of the Exchange Rate: the exchange rate that equates the quantities of the currency supplied and demanded in the foreign exchange market Bretton Woods System: an international monetary system under which most countries pegged their currencies to the U.S. dollar; from end of WW2 – 1971 Devaluation: a reduction in the official value of a currency (in a fixed-exchange-rate system) Evaluation: an increase in the official value of a currency (in a fixed-exchange-rate system) Overvalued Exchange Rate: an exchange rate that has an officially fixed value greater than its market equilibrium value Undervalued Exchange Rate: an exchange rate that has an officially fixed value less than its market equilibrium value Capital Controls: taxes or rules such as constraints on foreign exchange transactions that impede money flows between economies; sometimes used to prevent exchange rate fluctuations International Reserves: foreign currency assets held by a government for the purpose of purchasing the domestic currency in the foreign exchange market Balance-of-Payments Deficit: the net decline in a country’s stock of international reserves over a year Balance-of-Payments Surplus: the net increase in a country’s stock of international reserves over a year Speculative Attack: a massive selling of domestic currency assets by financial investors Real Exchange Rate: the nominal exchange rate between the currencies of two countries adjusted for changes in the relative price levels in the two countries since a base year Law of One Price: if transportation costs are relatively small, the price of an internationally traded commodity will be the same in all locations Purchasing Power Parity (PPP): the theory that nominal exchange rates are determined as necessary for the law of one price to hold Exchange Rates - The nominal exchange rate e for a given country is the number of units of foreign currency that can be bought for one unit of the domestic currency - An appreciation in an increase in the value of a currency relative to other currencies (a rise in e) - A depreciation is a decline in a currency’s value (a fall in e) - An exchange rate can be either flexible (varies freely according to supply/demand for the currency in the foreign exchange market) or fixed (its value is fixed by official government policy) Determination of Flexible Exchange Rates: Supply and Demand Analysis - Supply and demand analysis is a useful tool for studying the short-run determination of the exchange rate - Canadian households and firms supply Canadian dollars to the foreign exchange market to acquire foreign currencies (needed to purchase f
More Less

Related notes for ECON 1100

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit