Vecka 2 föreläsningar del 6 Flashcards
What are the Two definitions of nominal exchange rate?
- Indirect nominal exchange rate, Number of units of foreign currency per unit of domestic currency.
- Direct nominal exchange rate, Number of units of domestic currency per unit of foreign currency.
What is Depreciation?
When the value of a currency falls and goods from abroad become more expensive for as.
What is Appreciation?
When the value of the Currency rises and goods from abroad become cheaper for us.
What happens with the krona If euro appreciate against the krona?
The krona depreciate against the euro
Who are the Main actors on the foreign exchange market?
- commercial banks
- central banks
What are the purpose of the foreign exchange market?
- for trade in goods and services
- for financial investment purposes.
What are Financial investors primarily interested in?
Returns on assets.
How is The interest parity condition?
R = R* + (Ee-E)/E
What does the Left side of the interest parity condition stand for?
The Interest yield on domestic lending.
What does the rigt side of the interest parity condition stand for?
Returns on lending abroad.
When does the Interest rate parity condition holds?
When the yield is same everywhere. Then assets in all currencies are in equal demand so exchange rates will not change and there is equilibrium on the exchange market.
What happens If interest rate in Sweden is lowered?
The value of the krona falls and the krona depreciate against the Euro. Then the euro gets more expensive so people won’t invest in it.
What determine the interest rate in the model for the determination of domestic interest rates?
Money supply and demand
What is money?
Money ≠ Salary or wealth
it is Cash and bank funds for direct use.
Who determine the money supply and why?
Central bank because it has full control over monetary base and indirect control over broader monetary aggregates.
