Chapter 19 part 2 - IV. Flexible Exchange Rates A. Freely...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
IV. Flexible Exchange Rates A. Freely floating exchange rates are determined by the forces of demand and supply. Figure 36.1 (Key Graph) illustrates the exchange rate (price) for British pounds in American dollars. 1. The demand for any currency is downsloping because as the currency becomes less expensive, people will be able to buy more of that nation’s goods and, therefore, want larger quantities of the currency. 2. The supply of any currency is upsloping because as its price rises, holders of that currency can obtain other currencies more cheaply and will want to buy more imported goods and, therefore, will give up more of their currency to obtain other currencies. 3. As with other commodities, the intersection of the supply and demand curves for a currency (pounds in Figure 36.1) will determine the price or exchange rate. In the example it is $2 to 1 pound. B. Depreciation means the value of a currency has fallen; it takes more units of that country’s currency to buy another country’s currency. $3 for 1 pound would be a depreciation of the dollar, compared to the original example of $2 per pound. C.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 05/05/2008 for the course ECO 111 taught by Professor Kuryla during the Spring '08 term at Broome Community College.

Page1 / 2

Chapter 19 part 2 - IV. Flexible Exchange Rates A. Freely...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online