ECON 3150 Study Guide - Midterm Guide: Aggregate Demand, Fixed Exchange-Rate System, Currency Appreciation And Depreciation
13 Mar 2013
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Fixed exchange rate requires holding of foreign reserves usually low yielding assets, especially compared to alternative uses for the money. Despite this, the canadian dollar declined in value against the us dollar this week when investors anticipated that the bank of canada would not raise short-term interest rates. Covered interest parity can result in stable exchange rates even when interest rates differ, especially if there is a risk premium require for investments in canadian dollar financial assets. Canadian dollar both in spot and future markets. Investors may have taken b. of c. action as signal that canadian economy was weakening and future returns on investment in canadian dollar financial assets would be lower than expected. Since the bank took these actions, the yen has appreciated against the us dollar. Financial markets might have expected as a result that government would take every measure possible to stimulate japanese economy and thus increase returns on investments in select yen denominated financial assets.
