ECON 1102 Chapter Notes - Chapter 13: Hong Kong Monetary Authority, Hong Kong Dollar, Foreign Exchange Market

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27 Apr 2020

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Chapter 13: exchange rates and the open economy. Nominal exchange rate: the rate at which two currencies can be traded for each other. Suppose that one canadian dollar can be exchanged for 100 japanese yen. The amount of foreign currency needed to purchase one dollar (100 yen per dollar) or. The number of dollars needed to purchase one unit of foreign currency (0. 01 dollars per yen). Triangular arbitrage means that, if we know two exchange rates, we can determine the third. Suppose that we know the usd/cad rate and the eur/cad rate. Then the eur/usd rate must be: (eur/cad) / (usd/cad) = eur/usd. Figure 13. 1 shows how the u. s. dollar-canadian dollar exchange rate has changed over time. Appreciation: an increase in the value of a currency relative to another currency. Depreciation: a decrease in the value of a currency relative to another currency.

Related Questions

Suppose that one Euro can be exchanged for 1.3 U.S. dollars and that one U.S. dollar can be exchanged for 80 Japanese yen. If these currencies can be traded freely with low transaction costs, what exchange rate would you expect between the Euro and Japanese yen? Describe the transactions that would occur if the Euro-yen exchange rate is higher than this amount?

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Assume that the U.S. dollar and the Japanese yen are the only two currencies in the world.

a. A bilateral nominal exchange rate S is the spot (now) exchange value of one currency in terms of the other and S can be written as dollars per 1 yen or yen per 1 dollar. If S = yen/1 dollar = 76.92 then the inverse 1/S gives dollars per 1 yen where 1/S = 1/(yen/1 dollar) = 1/76.92 = .013. If the 1/S increases to .014, has the dollar appreciated (1 dollar is worth more yen) or depreciated (1 dollar is worth less yen)? Explain.

b. Changes in demand and supply in the foreign exchange (FX) market determine the value of floating exchange rates S. If S is expressed as S = yen/1 dollar, then we have the FX market in terms of the demand and supply of dollars. (If S = dollars/1 yen, then we get the FX market in terms of the demand and supply of yen. Note also that no matter which currency the FX market is expressed, it is still an FX market where dollars are exchanged for yen. This means that an upward-sloping supply of dollars curve is exactly the same as a demand for yen curve and a downward-sloping demand for dollars curve is exactly the same as a supply of yen curve). Using S = yen/1 dollar and the FX market in terms of the demand and supply of dollars, an increase in S (dollar appreciation) leads to an increase in the number of dollars supplied (increase in the quantity of yen demanded). For dollar demand (or the supply of yen), an increase in S (dollar appreciation) leads to a decrease in the number of dollars demanded (or an increase in the number of yen supplied). The dollar demand curve shifts to the right if more yen are offered for dollars at any exchange rate S. An increase in dollar demand is caused mostly by private sector transactions in the current and capital accounts. Either an increase in demand for U.S. goods (merchandise trade in the current account) or an increase in demand for U.S. stocks and bonds (capital account inflows) will shift the dollar demand curve to the right. If private transactions in the current and capital accounts also cause shifts in the dollar supply curve, what are the corresponding factors that would lead to an increase in dollars supplied (yen demanded) at any exchange rate S?

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1. ABC software, a small producer, decides to renovate its premises. Instead of hiring an outside contractor and tradespeople, the firm decides to use its employees---secretaries, programmers, sales staff, and others--to do most of the work. The firm makes all its employees try painting and carpentry and other tasks needed for the renovation and selects the people with the strongest skills in those areas to take time off their regular tasks and work on the renovation. Is the strategy a good one? Why or why not?

2. Suppose that one Euro can be exchanged for 1.3 U.S. dollars and that one U.S. dollar can be exchanged for 80 Japanese yen. If these currencies can be traded freely with low transaction costs, what exchange rate would you expect between the Euro and Japanese yen? Describe the transactions that would occur if the Euto-yen exchange rate is higher than this amount?

3. A government is considering a quota and a tariff, both of which will reduce imports by the same amount. Why might the government prefer one of these policies over the other?

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ECON 1102 Chapter Notes - Chapter 13: Hong Kong Monetary Authority, Hong Kong Dollar, Foreign Exchange Market

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