ECON 1010 Chapter Notes - Chapter 25: Foreign Exchange Market, Fixed Exchange-Rate System, Crawling Peg

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13 Jun 2013

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Foreign currency is the money of other countries regardless of whether that money is in the form of notes, coins, or bank deposits. Foreign exchange market is where the currency of one country is exchanged for a currency of another country. Exchange rate is the price at which one currency is exchanged for another currency in the foreign exchange market. An exchange rate is a price, the price of one currency in terms of another. The exchange rate is determined in the foreign currency exchange market. Quantity of canadian dollars demanded depends on: the exchange rate, world demand for canadian exports, interest rates in canada, expected future exchange rate. The higher the exchange rate, the smaller is the quantity demanded in the foreign exchange market. The exchanges rate influences the quantity of canadian dollars demanded for two reasons: exports effect, expected profit effect.

Related Questions

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

Just as with the price of a good, the price, or exchange rate, of a currency is determined by supply and demand. However, rather than using a traditional supply and demand analysis as shown in Marthinsen, currency traders often consider whether foreign funds will flow into or out of a country as a result of a particular economic circumstance. If foreigners wish to make domestic purchases or investments, the foreign currency must first be exchanged for the domestic currency. Thus, foreign funds flowing into a country increase the demand for the domestic currency and it appreciates. Funds flowing out reverse this process leading to depreciation of the domestic currency. In the table, place an X to indicate whether each economic condition will cause foreign funds to flow in or out of the country and whether the domestic currency will appreciate or depreciate.

Domestic circumstance	Funds flow in	Funds flow out	Currency appreciates	Currency depreciates
Real interest rates are higher than in other countries
Risk of civil war
Business taxes are raised above the world average				X
Expected stock market returns are better than elsewhere
Inflation increases
A large deposit of rare earth minerals is discovered
Rapidly growing manufacturing sector imports more foreign raw materials

ultramarinepug302

Just as with the price of a good, the price, or exchange rate, of a currency is determined by supply and demand. However, rather than using a traditional supply and demand analysis as shown in Marthinsen, currency traders often consider whether foreign funds will flow into or out of a country as a result of a particular economic circumstance. If foreigners wish to make domestic purchases or investments, foreign currency must first be exchanged for the domestic currency. Thus, foreign funds flowing into a country increase the demand for the domestic currency and it appreciates. Funds flowing out reverse this process leading to depreciation of the domestic currency. In the table, place an X to indicate whether each economic condition will cause foreign funds to flow in or out of the country and whether the domestic currency will appreciate or depreciate.

Domestic circumstance	Funds flow in	Funds flow out	Currency appreciates	Currency depreciates
Real interest rates are higher than in other countries
Risk of civil war
Business taxes are raised above world average
Expected stock market returns are better than elsewhere
Inflation increases
A large deposit of rare earth minerals is discovered
Rapidly growing manufacturing sector imports more foreign raw materials
World commodity prices (such as oil or grain) fall in a country that is a major commodity exporter
GDP increases
PI falls

orchidmosquito970

ECON 1010 Chapter Notes - Chapter 25: Foreign Exchange Market, Fixed Exchange-Rate System, Crawling Peg

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