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