Wk 6b Flashcards
What is mixed trading
When some currencies appreciate and others depreciate against another currency
What is the spot rate at the most recent date and at an earlier day
St and St-1
How is the percentage change in foreign currency calculated
(St - St-1/ St-1) x100
What is another definition for the exchange rate
The price of domestic currency in terms of of forgien assets
When is the supply curve for domestic assets vertical
When the amount of domestic assets can be fixed
When is the domestic asset supply curve upward sloping
When the amount of domestic assets can be changed
What happens at lower current values of the dollar
The quantity demanded of dollar assets are higher
Factors that influence the exchange rate
Percentage in the spot rate
Change in relative inflation
Change in relative income
Change in government
Change in expectations of the exchange rate
What happens if relative inflation rises in the US
- An increase in US demanded for british goods and pounds
- decrease in Uk desire for US goods and hence an decrease in thr supple of £
Dollar decreases and £ increases relative inflation increases
What happens to bank deposits when US relative interest rates increase
- US demand for British bank deposits decrease and hence the demand of the £ decreases
- British desire for US bank deposits increases and hence the supply of the £ increases
- Value of £ decreases and $ increases r0 to r1
What does relatively high interest rate reflect
Relatively high inflation which may discourage foreign investment
What is the fisher effect
Nominal interest rate - inflation = real interest rate
The next slide
?????
What happen when US income level increases
- An increase US demand for British goods and services £
- no expected change for the supply of £
Why may government influence the exchange rate
- imposing forgien exchange barriers
- imposing foreign trade barriers
- intervening in the forgien exchange market and affecting macro variables such as inflation, interest rates and income levels
Why may expectations affect exchange rate
- The market may react to news that may have a future effect
- Many institutional investors take currency positions based on
anticipated interest rate movements in various countries.
What happens when people speculate on emerging markets
It can have substantial impact on the exchange rate
What happens when economic signals affect the exchange rate
Speculators may overreact at first but eventually they make a correction
What happens when factors interact (example)
an increase in income levels sometimes causes
expectations of higher interest rates, therefore placing opposing
pressures on foreign currency values.
Next slide
Look at picture
What is the sensitivity of the exchange rate dependent on
The volume of international transactions between the two counties
What happens when there are large volumes of international trade
relative inflation rates may be more influential
What happens when there are large values of capital flows
Interest rate fluctuations may be more influential to the exchange rate
What happen if their is excess demand in the FEM
It causes the value of the dollar to fall
What happens if there is excess demand
It causes the value of the dollar to rise
What shifts the demand curve for domestic assets
Domestic interest rate
Forgien interest rate
Expected future exchange rate
What if there is a rise in domestic interest rate
Shifts the demand curve to the right leading to a rise of exchange rate
What happens if there is a rise in the forgien interest rate
Shifts the demand curve to the left leading to an decrease in the domestic exchange rate
What happens to the demand curve if there is an increase in expected future exchange rate
Shifts the demand curve to the right leading to an increase in the exchange rate
What happens when domestic real interest rate rises
The hr domestic currency appreciates
What happens if the domestic currency rises due to an expected increase in expected inflation
The domestic currency depreciates
What happen when there are changes in the money supply
A higher domestic money supply causes the domestic currency to depreciate.
Next slide
?????
How does speculation work
Between 2 currencies borrow in the weaker currency and invest in the stronger
currency providing that the interest rate difference is not too adverse
What is the strategy of the banks who speculate
The simple strategy is to get out of the currency about to depreciate and into
the currency that is going to appreciate against it. Then reverse the positions
after the event to end up with more than you started with.
