Chapter 10A | Demanders and Suppliers of Money

Question 1

Demand and Supply of Canadian Dollars

Answer 1

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.

Question 2

Exchange Rate

Answer 2

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

Question 3

Foreign exchange market -

Answer 3

worldwide market where currencies bought and sold

Question 4

Currency depreciation

Answer 4

fall in exchange rate of one currency for another

Question 5

Currency appreciation

Answer 5

rise in exchange rate of one currency for another

Question 6

Non-Canadians’ demand for C$ is demand for

Answer 6

Canadian exports and assets
Speculating on future value of C$

Question 7

Law of demand for Canadian Dollars

Answer 7

as exchange rate rises, quantity demanded of C$ decreases

Question 8

With a higher value of C$

Answer 8

Canadian exports and assets more expensive for R.O.W
R.O.W. buys less
Quantity demanded of C$ decreases

Question 9

Canadians’ supply of C$ is demand for

Answer 9

Foreign currency to buy imports & assets from R.O.W

Speculating on future value of C$

Question 10

Supply of one currency is demand for another currency

Answer 10

Supply of one currency is demand for another currency

Question 11

Law of supply for Canadian Dollars

Answer 11

as exchange rate rises, quantity supplied of C$ increases

Question 12

With higher value of C$

Answer 12

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

Question 13

Foreign Exchange Rates

Answer 13

At equilibrium exchange rate, quantity demanded = quantity supplied of C$

Question 14

Adjustment to equilibrium

Answer 14

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

Question 15

Remember, supply of one currency is demand for another currency

Answer 15

Americans demanding C$ supply US$ in exchange

Canadians demanding US$ supply C$ in exchange

Question 16

For reciprocal exchange rate, divide 1 by the other exchange rate

Answer 16

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

Question 17

Fluctuating Exchange Rates

Answer 17

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.

Question 18

Many economic forces changes both demand (curve) and supply (curve) in the foreign exchange market

Answer 18

Many economic forces changes both demand (curve) and supply (curve) in the foreign exchange market

Question 19

Interest rate differential

Answer 19

difference in interest rates between countries

Increase in Canadian interest rate differential causes C$ to appreciate (increases demand and decreases supply of C$)

Question 20

Inflation rate differential

Answer 20

difference in inflation rates between countries

• Increase in Canadian inflation rate differential causes C$ to depreciate (decreases demand and increases supply of C$)

Question 21

Effects of increasing Canadian real GDP on C$

Answer 21

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

Question 22

Increasing R.O.W demand for Canadian exports causes

Answer 22

slight appreciation of C$ (increases demand for C$)

Question 23

Rising world prices for Canadian exports causes

Answer 23

C$ to appreciate relative to currencies of non-resource producing countries (increases demand for C$)

Question 24

Currency speculators are the most important force for fluctuations of foreign exchange rates

Answer 24

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$