ECON102 Chapter Notes - Chapter 25: Foreign Exchange Market, Crawling Peg, Purchasing Power Parity

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lemonbeetle804

15 Jun 2018

School

University of Waterloo

Department

Economics

Course

ECON102

Professor

Maria Viola

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Chapter 25:

Foreign Currency: The money of other countries regardless of whether the money

is in the form of notes, coins, or bank deposits.

Influences on Quantity Demanded in the Foreign Exchange Market:

- The exchange rate

o Exports effect

o Expected profit effect

Influences on Demand:

- World demand for Canadian exports

- Canadian interest rate relative to the foreign interest rate

- The expected future exchange rate

Influences on Quantity Supplied in the Foreign Exchange Market:

- The exchange rate

o Imports effect

o Expected profit effect

Influences on Supply:

- Canadian demand for imports

- Canadian interest rate relative to the foreign interest rate

- The expected future exchange rate

Canadian Interest Rate Differential: The Canadian interest rate minus the foreign

interest rate.

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Foreign currency: the money of other countries regardless of whether the money is in the form of notes, coins, or bank deposits. Influences on quantity demanded in the foreign exchange market: The exchange rate: exports effect, expected profit effect. Influences on quantity supplied in the foreign exchange market: The exchange rate: imports effect, expected profit effect. Canadian interest rate relative to the foreign interest rate. Canadian interest rate differential: the canadian interest rate minus the foreign interest rate. Arbitrage: the practice of seeking to profit by buying in one market and selling for a higher price in another related market. The law of one price: states that if an item is traded in more than one place, the price will be the same in all locations. Interest rate parity: equal rates of return across currencies. For risk-free transactions, there is no gain from choosing one currency over another. Speculation: trading on the expectation of making profit.

Related Questions

23) Which of the following factors move the demand curve for Canadian dollars and the supply curve of Canadian dollars in opposite directions? A) The interest rate differential increases or decreases. B) Canadian imports increase or decrease. C) The world demand for Canadian exports increases or decreases. D) The expected future exchange rate rises or falls. E) Both A and D above

22. The quantity equation of money supply is not true if velocity is not constant.

True

False

24. A decrease in which of the following factors (from the perspective of the domestic country) would cause a depreciation of the domestic currency in the short run?

	A.	foreign interest rate
	B.	relative productivity
	C.	relative expected export demand
	D.	all of the above

27. According to both Keynes and Friedman, the demand for money decreases with a decrease in

	A.	the interest rate.
	B.	the return on bonds minus the return on money.
	C.	permanent income.
	D.	the spread between the interest rates on bonds and money.

28. According to the interest parity condition, the domestic interest rate falls if the _____ rises, ceteris paribus.

	A.	foreign interest rate
	B.	exchange rate
	C.	expected future exchange rate
	D.	none of the above

29. A difference between m₁ and m₂ is that m₂ takes ____ into account.

	A.	excess reserves
	B.	the currency ratio
	C.	time deposits
	D.	coins and notes

If a country's central bank adopts an expansionary monetary policy, which of the following is most likely to be the effect of such as policy, all other factors remaining unchanged? (Please give a brief explanation for your choice.)

A. An increase in the price level that reduces the real value of households' money holdings and stimulates consumer spending

B. A decrease in the price level that reduces the interest rate and lowers the real value of the domestic currency foreign-exchange market

C. An increase in the price level that stimulates spending on net exports and increases the demand for money

D. A decrease in the price level that reduces the amount of money that people want to hold and decreases the interest rate

ECON102 Chapter Notes - Chapter 25: Foreign Exchange Market, Crawling Peg, Purchasing Power Parity

ECON102 Full Course Notes

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