ECON 1010 Chapter 25: ECON1010 Notes - Chapter 25
Document Summary
Foreign exchange market currency of one country exchanged for currency of another. Determining exchange rate; supply + demand: exchange rate is determined by demand/supply of canadian dollar in foreign market, demand in foreign market is derived demand; canadian demand dependent on, exchange rate quantity demanded . Result of export effect lower exchange rater = larger value of canadian exports = greater quantity of canadian dollars demanded. Result of expected profit effect lower exchange rater = larger expected profit from buying. Result of import effect higher exchange rate = larger canadian imports = more cad. Result of expected profit effect - given expected future canadian dollar exchange rate = lower current exchange rate = greater expected profit from holding canadian dollars = smaller quantity. Return on currency interest rate on currency + expected rate of appreciation over period: purchasing power parity two quantities of money can buy same quantity of good/services. Quantity of goods/services one unit will buy differs between currencies.