ECON 3580 Study Guide - Summer 2018, Comprehensive Midterm Notes - Exchange Rate, Aggregate Demand, Money Supply
12 Oct 2018
School
Department
Course
Professor
ECON 3580
MIDTERM EXAM
STUDY GUIDE
Fall 2018
Econ 3580
Lecture 1
Definitions of Exchange Rates
• Exchange rates are quoted as foreign currency per unit of domestic currency or domestic
currency per unit of foreign currency.
– How much can be exchanged for one dollar? ¥89.40/$
– How much can be exchanged for one yen? $0.011185/¥
• Exchange rates allow us to denominate the cost or price of a good or service in a common
currency.
– How much does a Nissan cost? ¥2,500,000
Or, ¥2,500,000 x $0.011185/¥ = $27,962.50
Depreciation and Appreciation
• Depreciation is a decrease in the value of a currency relative to another currency.
– A depreciated currency is less valuable (less expensive) and therefore can be
exchanged for (can buy) a smaller amount of foreign currency.
– $1/€ → $1.20/€ means that the dollar has depreciated relative to the euro. It now
takes $1.20 to buy one euro, so that the dollar is less valuable.
– The euro has appreciated relative to the dollar:
it is now more valuable.
• Appreciation is an increase in the value of a currency relative to another currency.
– An appreciated currency is more valuable (more expensive) and therefore can be
exchanged for (can buy) a larger amount of foreign currency.
– $1/€ → $0.90/€ means that the dollar has appreciated relative to the euro. It now
takes
only $0.90 to buy one euro, so that the dollar is more valuable.
– The euro has depreciated relative to the dollar:
it is now less valuable.
• A depreciated currency is less valuable, and therefore it can buy fewer foreign produced
goods that are denominated in foreign currency.
– A Nissan costs ¥2,500,000 = $25,000 at $0.010/¥
– becomes more expensive $27,962.50 at $0.011185/¥
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find more resources at oneclass.com
• A depreciated currency means that imports are more expensive and domestically
produced goods and exports are less expensive.
• A depreciated currency lowers the price of exports relative to the price of imports.
• An appreciated currency is more valuable, and therefore it can buy more foreign
produced goods that are denominated in foreign currency.
– A Nissan costs ¥2,500,000 = $27,962.50 at $0.011185/¥
– becomes less expensive $25,000 at $0.010/¥
• An appreciated currency means that imports are less expensive and domestically
produced goods and exports are more expensive.
• An appreciated currency raises the price of exports relative to the price of imports.
Foreign Exchange Markets
• The set of markets where foreign currencies and other assets are exchanged for domestic
ones
– Institutions buy and sell deposits of currencies or other assets for investment
purposes.
• The daily volume of foreign exchange transactions was $4.0 trillion in April 2010
– up from $500 billion in 1989.
• Most transactions (85% in April 2010) exchange foreign currencies for U.S. dollars.
The participants:
1. Commercial banks and other depository institutions: transactions involve buying/selling
of deposits in different currencies for investment purposes.
2. Non-bank financial institutions (mutual funds, hedge funds, securities firms, insurance
companies, pension funds) may buy/sell foreign assets for investment.
3. Non-financial businesses conduct foreign currency transactions to buy/sell goods,
services and assets.
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Definitions of exchange rates: exchange rates are quoted as foreign currency per unit of domestic currency or domestic currency per unit of foreign currency. sh. 011185/ : exchange rates allow us to denominate the cost or price of a good or service in a common currency. Depreciation and appreciation: depreciation is a decrease in the value of a currency relative to another currency. A depreciated currency is less valuable (less expensive) and therefore can be exchanged for (can buy) a smaller amount of foreign currency. / . 20/ means that the dollar has depreciated relative to the euro. It now takes . 20 to buy one euro, so that the dollar is less valuable. The euro has appreciated relative to the dollar: it is now more valuable: appreciation is an increase in the value of a currency relative to another currency. An appreciated currency is more valuable (more expensive) and therefore can be exchanged for (can buy) a larger amount of foreign currency.
