ECON 3740 Lecture Notes - Lecture 3: Currency Appreciation And Depreciation

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ivoryserval655

11 Dec 2017

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Nominal exchange rate the value of o(cid:374)e cou(cid:374)try"s curre(cid:374)cy i(cid:374) ter(cid:373)s of a(cid:374)other cou(cid:374)tries currency. When the value of the dollar is high, the quantity demanded will be low and therefore supply will be high. Currency exchange market is a simple demand and supply graph where exchange rate is on the y-axis and quantity of dollars traded is on the x-axis. When price is low supply is low and demand is high. Currency appreciation an increase in the market value of one currency relative to another currency. Currency depreciation a decrease in the value of one currency in comparison to another currency.

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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

13. People or firms use one currency to purchase another currency at the ___. A. international currency exchange B. foreign exchange market C. foreign currency exchange D. international parity market

17. If government policy allows a country's currency to be determined in the exchange rate market, then that currency will be subject to A. a hard peg policy. B. purchasing power parity. C. depreciation. D. a floating exchange rate.

19. Which of the following is an example of a pegged currency?

A. U.S. dollar B. British pound C. Euro D. Chinese yuan

22. Using the term "spillover" is a less formal means of describing

A. an externality. B. social costs. C. private costs. D. market failure.

32. Steve and Craig have been shipwrecked on a deserted island in the South Pacific. Their economic activity consists of either gathering pineapples or fishing. We know Steve can catch four fish in one hour or harvest two baskets of pineapples. In the same time Craig can reel in two fish or harvest two baskets of pineapples.

Assume Craig and Steve both operate on straight-line production possibilities curves. What is Steve's opportunity cost of producing a basket of pineapples? Of a producing a fish? What is Craig's opportunity cost of producing a basket of pineapples? Of a producing a fish?

ECON 3740 Lecture Notes - Lecture 3: Currency Appreciation And Depreciation

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