Ch10_macro

Ch10_macro - Chapter 10: The Exchange Rate and the Balance...

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Chapter 10: The Exchange Rate and the Balance of Payments Objectives: Describe the foreign exchange market, define the exchange rate, and distinguish between the nominal exchange rate and the real exchange rate Explain how an exchange rate is determined day by day Explain the long-run trends in the exchange rate and explain interest rate parity and purchasing power parity Describe the balance of payments accounts and explain what causes an international deficit Describe the alternative exchange rate policies and explain their long-run effects
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Currencies and Exchange Rates The Foreign Exchange Market To buy goods and services produced in another country we need money of that country. Foreign bank notes, coins, and bank deposits are called foreign currency. We get foreign currency and foreigners get U.S dollars in the foreign exchange market. The foreign exchange market is the market in which the currency of one country is exchanged for the currency of another.
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Currencies and Exchange Rates Foreign Exchange Rates The price at which one currency exchanges for another is called a foreign exchange rate . A fall in the value of one currency in terms of another currency is called currency depreciation . A rise in value of one currency in terms of another currency is called currency appreciation .
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Currencies and Exchange Rates Figure 10.1 shows how the U.S. dollar has moved against other currencies from 1995 to 2005.
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Currencies and Exchange Rates 2:01 p.m. EDT 03/27/09 Dollar Euro Pound SFranc Peso Yen CdnDlr Canada 1.2410 1.6507 1.7733 1.0855 0.08665 0.01267 ... Japan 97.980 130.32 140.00 85.707 6.8412 ... 78.952 Mexico 14.322 19.050 20.465 12.528 ... 0.14617 11.541 Switzerland 1.1432 1.5206 1.6335 ... 0.07982 0.01167 0.92119 U.K. 0.69984 0.93086 ... 0.61218 0.04886 0.00714 0.56393 Euro 0.75182 ... 1.0743 0.65765 0.05249 0.00767 0.60582 U.S. ... 1.3301 1.4289 0.87474 0.06982 0.01021 0.80580
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Currencies and Exchange Rates Nominal and Real Exchange Rates The nominal exchange rate is the value of the U.S. dollar expressed in units of foreign currency per U.S. dollar. It is a measure of how much of one money exchanges for a unit of another currency. The real exchange rate is the relative price of foreign- produced goods and services. It is a measure of the quantity of real GDP of other countries that we get for a unit of U.S. real GDP.
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Currencies and Exchange Rates Trade-Weighted Index The trade-weighted index is the average exchange rate of the U.S. dollar against other currencies, with individual currencies weighted by their importance in U.S. international trade.
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The Foreign Exchange Market The Demand for One Money Is the Supply of Another Money When people who are holding one money want to exchange it for U.S. dollars, they demand U.S. dollars and they supply that other country’s money. So the factors that influence the demand for U.S.
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Ch10_macro - Chapter 10: The Exchange Rate and the Balance...

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