Intl Finance Exchange rates Flashcards
An exchange rate.
measures the value of one currency in
units of another currency
depreciation.
A decline in a currency’s value. When the British
pound depreciates against the U.S. dollar, this means that the U.S. dollar is strengthening
relative to the pound.
This means that it takes BR more pounds to buy same amt of US dollars
appreciation.
An increase in currency value
Ex
Br pound appreciates
So Br can buy more Us goods for same amt of pounds
exchange rates are determined by
supply and demand
Demand schedule
The U.S. demand for British pounds results partly from international trade, as U.S. firms
obtain British pounds to purchase British products. This demand schedule is downward
sloping because corporations and individuals in the United States would purchase more
British goods when the pound is worth less (since then it takes fewer dollars to obtain
the desired amount of pounds).
Supply schedule
British demand for U.S. dollars. British supply of pounds for sale, since pounds are supplied in the foreign exchange market in exchange for U.S. dollars When the pound’s valuation
is high, British consumers and firms are more willing to exchange their pounds
for dollars to purchase U.S. products or securities; hence they supply a greater number
of pounds to the market to be exchanged for dollars. Conversely, when the pound’s valuation
is low, the supply of pounds for sale (to be exchanged for dollars) is smaller,
reflecting less British desire to obtain U.S. goods.
Increase in Demand for country’s currency
P ^ , Q ^
The currency appreciates
Decrease in Demand for country’s currency
P down , Q down
Country’s currency depreciated
Increase in Supply for country’s currency
P down, Q up
The country’s currency depreciates
Decrease in Supply for country’s currency
P up, Q down
Country’s currency appreciates
U.S inflation goes up, what happens to D, S, Price
US demand goes up, British dont buy US goods so supply goes down, This pressures exchange rate Prices to go up
U.S interest rates goes up what happens to D, S, Price
Demand for pound drops b/c US investors favor US rates. it also attracts BR investors so supply increases. Thus, price increases
real interest rates
adjusted for inflation
U.S income increases, what happens to D, S, Price
Demand increases, supply stays the same. P increases.
fixed exchange rate system
exchange rates are either held constant or allowed to
fluctuate only within very narrow boundaries
