EC250 Chapter Notes - Chapter 4: Excess Supply, Direct Tax, Devaluation

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7 Mar 2016
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
4.1 Preliminaries:

Spot Exchange: 
Forward Exchange:
Spot Exchange Rate:


 
!
Forward Exchange Rate:

"#$
%&'()*+
"

The Foreign Exchange Market:
$,$$
%
-&&&./"
$
o+##
Foreign Currency Reserves: "$*%
$
4.2 Flexible Exchange Rates:
Flexible Exchange Rate: 
$
oAppreciation:0
oDepreciation:+
4.2.1 Determination of Exchange Rate Under Flexible Exchange Rate:
"
+1"2%
o3!!,4%5%/6"!/750859%,/
"1+2+
o"!3/5"/,6!5%/69%,/8!"+!4
Demand for Canadian Dollars:
58*"*%+
+**CANADIAN DOLLARS 
o+0
Foreign Demand for Canadian Goods and Services:
o,8
0
o5
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

0
oReal exchange rate is the same thing as nominal when it comes to demand for goods
Foreign Demand for Canadian Physical Assets:
o,%5+
%5++
+5
+5
o5%,+
%,++
Foreign Demand for Canadian Paper Assets:
o5%5+5
+
o,%:,+,
+
Transactions through Intermediaries:
$$
!$
" $+
0$
Transactions without the use of $CAN:

Supply of Canadian Dollars:
5foreign goods/services/assets 

oBasically More they want foreign stuff more they will participate in the foreign
exchange market
Canadian Demand for Foreign Goods and Services:
o58
00+"3
o,
"
Canadian Demand for Foreign Physical Assets:
o5
"3$0
+
o,
,3$+
+
Canadian Demand for Foreign Paper Assets:
o 
o09:
"$0

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Document Summary

Two types of exchange rates spot and forward. Forward exchange: rate which contracts for future delivery are executed future transactions. Nominal exchange rate in terms of foreign currency. Number of units to purchase one canadian dollar. Price of one canadian dollar in terms of other country"s currency. Price of nit of a foreign currency delivered in future. So basically firms create a contract to eliminate currency risk. Agree on a exchange rate for instance 0. 87 euros/dollar. So in one year from now or whenever in the future they will use the agreed currency and now any new ones. Forex electronic market linking banks around the world. 4 trillion (4 000 billion) us dollars a day. Responsibility of exchange rates rest on central bank: decide whether want it to be fixed or flexible. Foreign currency reserves: stocks/assets that foreign currencies offer or issued by foreign currencies and held by central bank.

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