Chapter 10A | Demanders and Suppliers of Money Flashcards
Demand and Supply of Canadian Dollars
The demand for products, services, and assets from other countries, which must be paid for in local currencies, are behind demand and supply on the foreign exchange market, determining exchange rates.
Exchange Rate
price one currency exchanges for another currency
- Exchange rate is the price of 1 Canadian Dollar
If the price of C$1.00 = US$0.80, it takes 80 cents U.S. to buy 1 Canadian Dollar
Foreign exchange market -
worldwide market where currencies bought and sold
Currency depreciation
fall in exchange rate of one currency for another
Currency appreciation
rise in exchange rate of one currency for another
Non-Canadians’ demand for C$ is demand for
Canadian exports and assets
Speculating on future value of C$
Law of demand for Canadian Dollars
as exchange rate rises, quantity demanded of C$ decreases
With a higher value of C$
Canadian exports and assets more expensive for R.O.W
R.O.W. buys less
Quantity demanded of C$ decreases
Canadians’ supply of C$ is demand for
Foreign currency to buy imports & assets from R.O.W
Speculating on future value of C$
Supply of one currency is demand for another currency
Supply of one currency is demand for another currency
Law of supply for Canadian Dollars
as exchange rate rises, quantity supplied of C$ increases
With higher value of C$
R.O.W. imports and assets less expensive for Canadians
Canadians buy more of them
Canadians need/demand more foreign currency, so quantity supplied of C$ increases
Foreign Exchange Rates
At equilibrium exchange rate, quantity demanded = quantity supplied of C$
Adjustment to equilibrium
Below equilibrium exchange rate, excess demand (shortages) for C$, buyers’ competition causes exchange rate to rise
Above equilibrium exchange rate, excess supply (surpluses) for C$, sellers’ competition causes exchange rate to fall
Remember, supply of one currency is demand for another currency
Americans demanding C$ supply US$ in exchange
Canadians demanding US$ supply C$ in exchange
For reciprocal exchange rate, divide 1 by the other exchange rate
If C$1.00 = US$0.80, reciprocal exchange rate is US$1.00 = 1/0.80 = C$1.25
When C$ appreciates against any currency that currency depreciates against C$, and vice versa
Fluctuating Exchange Rates
Exchange rate fluctuations are caused by changes in interest rate differentials, inflation rate differentials, Canadian real GDP, R.O.W. demand for Canadian exports and world prices, and expectations by speculators.
Many economic forces changes both demand (curve) and supply (curve) in the foreign exchange market
Many economic forces changes both demand (curve) and supply (curve) in the foreign exchange market
Interest rate differential
difference in interest rates between countries
Increase in Canadian interest rate differential causes C$ to appreciate (increases demand and decreases supply of C$)
Inflation rate differential
difference in inflation rates between countries
- Increase in Canadian inflation rate differential causes C$ to depreciate (decreases demand and increases supply of C$)
Effects of increasing Canadian real GDP on C$
Increased investor confidence causes strong appreciation (big increase demand C$, decrease supply C$)
(Less important) Increased imports - small depreciation (small increase supply C$)
Net effect is C$ appreciates
Increasing R.O.W demand for Canadian exports causes
slight appreciation of C$ (increases demand for C$)
Rising world prices for Canadian exports causes
C$ to appreciate relative to currencies of non-resource producing countries (increases demand for C$)
Currency speculators are the most important force for fluctuations of foreign exchange rates
Daily value world goods trade 2013 = $52 billion
Daily value foreign exchange 20313 = $5.3 trillion
Speculators behind 99% of FOREX transactions
Expected rise in future price of the C$ causes appreciation of C$ (increases demand for C$)
Speculators reinforce and speed up effects of other forces on the price of C$
