Wk 6b

Question 1

What is mixed trading

Answer 1

When some currencies appreciate and others depreciate against another currency

Question 2

What is the spot rate at the most recent date and at an earlier day

Answer 2

St and St-1

Question 3

How is the percentage change in foreign currency calculated

Answer 3

(St - St-1/ St-1) x100

Question 4

What is another definition for the exchange rate

Answer 4

The price of domestic currency in terms of of forgien assets

Question 5

When is the supply curve for domestic assets vertical

Answer 5

When the amount of domestic assets can be fixed

Question 6

When is the domestic asset supply curve upward sloping

Answer 6

When the amount of domestic assets can be changed

Question 7

What happens at lower current values of the dollar

Answer 7

The quantity demanded of dollar assets are higher

Question 8

Factors that influence the exchange rate

Answer 8

Percentage in the spot rate
Change in relative inflation
Change in relative income
Change in government
Change in expectations of the exchange rate

Question 9

What happens if relative inflation rises in the US

Answer 9

• 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

Question 10

What happens to bank deposits when US relative interest rates increase

Answer 10

• 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

Question 11

What does relatively high interest rate reflect

Answer 11

Relatively high inflation which may discourage foreign investment

Question 12

What is the fisher effect

Answer 12

Nominal interest rate - inflation = real interest rate

Question 13

The next slide

Answer 13

?????

Question 14

What happen when US income level increases

Answer 14

• An increase US demand for British goods and services £
• no expected change for the supply of £

Question 15

Why may government influence the exchange rate

Answer 15

• 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

Question 16

Why may expectations affect exchange rate

Answer 16

• 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.

Question 17

What happens when people speculate on emerging markets

Answer 17

It can have substantial impact on the exchange rate

Question 18

What happens when economic signals affect the exchange rate

Answer 18

Speculators may overreact at first but eventually they make a correction

Question 19

What happens when factors interact (example)

Answer 19

an increase in income levels sometimes causes
expectations of higher interest rates, therefore placing opposing
pressures on foreign currency values.

Question 20

Next slide

Answer 20

Look at picture

Question 21

What is the sensitivity of the exchange rate dependent on

Answer 21

The volume of international transactions between the two counties

Question 22

What happens when there are large volumes of international trade

Answer 22

relative inflation rates may be more influential

Question 23

What happens when there are large values of capital flows

Answer 23

Interest rate fluctuations may be more influential to the exchange rate

Question 24

What happen if their is excess demand in the FEM

Answer 24

It causes the value of the dollar to fall

Question 25

What happens if there is excess demand

Answer 25

It causes the value of the dollar to rise

Question 26

What shifts the demand curve for domestic assets

Answer 26

Domestic interest rate
Forgien interest rate
Expected future exchange rate

Question 27

What if there is a rise in domestic interest rate

Answer 27

Shifts the demand curve to the right leading to a rise of exchange rate

Question 28

What happens if there is a rise in the forgien interest rate

Answer 28

Shifts the demand curve to the left leading to an decrease in the domestic exchange rate

Question 29

What happens to the demand curve if there is an increase in expected future exchange rate

Answer 29

Shifts the demand curve to the right leading to an increase in the exchange rate

Question 30

What happens when domestic real interest rate rises

Answer 30

The hr domestic currency appreciates

Question 31

What happens if the domestic currency rises due to an expected increase in expected inflation

Answer 31

The domestic currency depreciates

Question 32

What happen when there are changes in the money supply

Answer 32

A higher domestic money supply causes the domestic currency to depreciate.

Question 33

Next slide

Answer 33

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Question 34

How does speculation work

Answer 34

Between 2 currencies borrow in the weaker currency and invest in the stronger
currency providing that the interest rate difference is not too adverse

Question 35

What is the strategy of the banks who speculate

Answer 35

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.