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Flashcards in CH 17 Deck (21)
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1

What is a Foreign Exchange Market?

A market in which one country's currency is traded for another country's.

2

What is the definition of the Exchange Rate?
What are the two ways it is expressed with dollars?

The amount of one country's currency that is traded for one unit of another's currency.

--Units of Foreign Currency per Dollar-- L/$
--Dollars per Unit of Foreign Currency-- $/L

3

If the exchange rate for Dollars per L is 1.5820, how would you get the L per Dollar?

By taking the reciprocal we can convert the exchange rates.

1/1.5820= .6321 L per $

4

Why do American's demand the British Pound?

2 Reasons:

To buy Goods and Services from British Firms
&
To buy British Assets

Same with any demand of Foreign Currency

5

What is the Demand Curve for Foreign Currency?

Which way does it slope?

A curve indication the quantity of a specific foreign currency that Americans will want to buy, during a given period, at each different exchange rate.

--Downward Sloping--

6

What moves us Along the Demand for British Pounds Curve?

Price Level Moves us Along the Curve. At a lower price level, there is a higher Demand for Pounds.

7

What Shifts the whole Demand for British Pound Curve?

US Real GDP
Relative Price Level (inverse)
Americans' Taste for British Goods
Relative Interest Rate
Expected Changes in the Exchange Rate

8

What is the Supply Curve for Foreign Currency?

Which way does it slope?

A curve indicating the quantity of a specific foreign currency that will be supplied, during a given period, at each different exchange rate.

--Upward Sloping--

9

Why do the British want to supply Pounds in the Dollar-Pound Market? (Why do they want dollars)

2 Reasons:

To buy Goods and Services from American Firms
&
To buy American Assets

10

What moves us Along the Supply of Pounds Curve?

Price Level Moves us ALONG the Curve. At a lower Price level, people want to supply less Pounds.

11

What Shifts the whole Supply of Pounds Curve?

British Real GDP
Relative Price level (inverse)
British taste for US Goods
Relative Interest Rate
Expected change in the Exchange Rate

12

What is a Floating Exchange Rate?

An exchange rate that is freely determined by the forces of Supply and Demand in the Market.

13

What is Currency Appreciation? What is the concept underlying it?

An increase int he price of a currency in a floating-rate system.

Underlying: Purchasing Power Parity

14

What is the Currency Depreciation? What is the concept underlying it?

A decrease int he price of a currency in a floating-rate system.

Underlying: Purchasing Power Parity

15

When a floating exchange rate changes....

One country's currency will appreciate (rise in price) while another country's currency will depreciate (fall in price)

16

How do exchange rate change over time? Give the three time period..

The Very Short Run-- Weeks, Days, Minutes
The Short Run-- Several Months, A year or two
The Long Run-- Two years+

17

What causes Exchange Rate to change in the Very Short Run? What is "Hot Money"?

Hot Money is large amounts of money at the hand of investors and traders that can be moved very quickly.

In the VSR: Relative Interest Rates and Expectations on Future Exchange Rates are the forces moving the exchange rate.

18

What causes Exchange Rate to change in the Short Run?

In the SR: Exchange rates are largely caused by (Macro) Economic Fluctuations

(change in GDP)
GDP Increase-- Currency Depreciation
GDP Decrease-- Currency Appreciation

19

What causes Exchange Rate to change in the Long Run? What does this reflect?

Relative Price Levels and Concept of Purchasing Power Parity. Reflects the PRICE RATIO between two countries.

20

Define Purchasing Power Parity?

How will the currency's change?

The idea that exchange rates will adjust in the long run so that the average price of goods in two countries will be roughly the same.

The currency of a country with high inflation will depreciate against the currency of a country whose inflation rate is lower.

21

Give a situation that explains the PPP?

When there is a special deal that (the price ratio) is better than the exchange rate, People will take advantage and trade that item, raising demand and pushing the ratio towards the actual exchange rate.