ECON102 Lecture 6: Chapter 25

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carminescorpion131

9 Nov 2016

School

University of Waterloo

Department

Economics

Course

ECON102

Professor

Joseph Dejuan

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ECON102 Full Course Notes

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We need money to buy goods and services from other countries. Foreign currency are foreign bank notes, coins, and bank deposits. Foreign exchange market is the market in which the currency of one country is exchanged for the currency of another. Exchange rate (more specifically, nominal exchange rate) is the price at which one currency exchanges for another. Exchange rate is determined in a market-the foreign exchange market. We will be using the exchange rate as the units of foreign currency per one canadian dollar. Fall in the value of one currency relative to another is called currency depreciation. Rise in value of one currency relative to another is called currency appreciation. Demand and supply in the foreign exchange (forex) market. With many traders and no restrictions, the foreign exchange market is a competitive market. Ceteris paribus, the higher the exchange rate, the smaller is the quantity of canadian dollars demanded in the forex market.

Related Questions

Foreign exchange markets make it possible for trade to be enacted between countries without lengthy negotiations on trade terms. The exchange rate mechanism is a relatively stable process whereby different currencies can be exchanged in an orderly manner in conformity to the rules of currency exchange rates. Factors, such as the relative inflation and unemployment rates between the trading partners, affect the value of each country's currency in relation to the other countries' currency. The country with higher inflation and unemployment will have the lower valued currency.

(A.) Why is the foreign currency exchange market important to a business?

(B.) What is the benefit of the foreign currency exchange market to the U.S. company?

(C.) If the U.S. currency is decreasing versus other currencies of countries it trades with, how will that affect the U.S. company? If the reverse is true, how will that affect the US company?

orchiddonkey965

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?

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

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ECON102 Lecture 6: Chapter 25

ECON102 Full Course Notes

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