ECON 3K03 Lecture Notes - Lecture 19: Foreign Exchange Market, The Foreign Exchange, Purchasing Power Parity
8 Feb 2015
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Document Summary
The economics of money, banking, and financial markets. Learning objectives: summarize the basic function performed by the. Identify the factors that lead to changes in the exchange rate in the long run. Foreign exchange market: exchange rate: price of one currency in terms of another, foreign exchange market: the financial market where exchange rates are determined, spot transaction: immediate (two-day) exchange of bank deposits. Spot exchange rate: forward transaction: the exchange of bank deposits at some specified future date. Foreign exchange market (cont"d: appreciation: a currency rises in value relative to another currency, depreciation: a currency falls in value relative to another currency, when a country"s currency appreciates: The country"s goods abroad become more expensive. Foreign goods in that country become less expensive: over-the-counter market: mainly banks. Exchange rates in the long run: law of one price. All goods are identical in both countries: exchange rates will adjust to reflect changes in relative prices levels.
