ECON10003 Chapter Notes - Chapter 15: Foreign Exchange Market, Demand Curve, Speculative Attack
The nominal exchange rate is the rate at which two currencies can be traded for each other
A direct quote indicates how much of the domestic currency is required to purchase one unit of the
foreign currency
An indirect quote indicates how much of the foreign currency is required to purchase one unit of the
domestic currency
e = indirect exchange rate
Appreciation = increase in value = increase in e
Depreciation = decrease in value = decrease in e
The trade weighted index expresses the value of the currency as an average of its values against
other major currencies, weighted by the amount of international trade undertaken
The value of a flexible exchange rate varies according to the supply and demand for the currency in
the foreign exchange market
The value of a fixed exchange rate is set by official government policy
Nominal exchange rates
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The real exchange rate indicates the price of the average domestic good or service in terms of the
average foreign good or service
Real exchange rate = eP/P
f
Domestic goods are on average more expensive than foreign goods
-
Net exports are low (imports > exports)
-
A high real exchange rate:
Domestic goods are on average cheaper than foreign goods
-
Net exports are high (exports > imports)
-
A low real exchange rate:
The real exchange rate tends to move in the same direction as the nominal exchange rate
The real exchange rate
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Document Summary
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