ECON 340 Class Notes Ch 12-15

ECON 340 Class Notes Ch 12-15 - ECON 340 Class Notes...

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ECON 340 Class Notes Chapters 12-15 CHAPTER 12 Foreign Exchange Markets: Define Demand and Supply -Demand Curve – Quantity demanded of foreign currency as function of exchange rate -Supply Curve – Quantity supplied as a function of exchange rate What determines if a unit demands foreign currency 1. Rate of return Exchange Rate – The number of units of domestic currency required to purchase foreign currency. -ex. $/Euro, $/$Canadian, $/Yen Spot Foreign Exchange Market – Participants trade currencies for present delivery. Arbitrage – Process by which banks, firms, or individuals seek to earn a profit by taking advantage of discrepancies Buying Short – Wait and buy late Balanced or Closed Position – Bought the currency. The risk is no longer present. Speculation – Wealth depends on fluctuations in the exchange rate Selling Long – 1. Buy a deposit in a foreign currency and wait for the price to rise. 2. Promise to sell at a rate when they expect the price of the foreign currency to fall. Forward Market – But a contract today for a ($) deposit to be delivered in 30, 60, 90, 180 days. Maximize expected return 1. Spot Rates (today) 2. Spot Rates (future) 3. Interest rates (both countries) 4. Forward exchange rate Government Decide on exchange rate regime. 1. Flexible or floating exchange rate (When the market decides) i. Competitive Market ii. Homogenous iii. Good Info iv. Entry and exit unrestricted Floating System – Currency appreciate in relation to some other currency Appreciate is increase in value relative to some other currency -APPRECIATION Fixed System – Revaluate a currency is to readjust the fixed exchange rate Devalue -REVALUATION 2. Fixed exchange rate (When government sets some level of exchange) 3. Mixed flexible and floating or managed floating rate 4. Exchange controls (Government maintains monopoly control) 1. Flexible or floating exchange rate regime
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CH 12 RQ 1 c) Alpha bank will sell beta from foreign reserves to fill in for the shortage created by access demand of beta d) Alpha depletes exchange reserves and either borrows from IMF/different countries or must revalue money closer to equilibrium f) If they were to announce a devaluation then it would make the individuals in that country make the devaluing occur as they would sell off their currency and drive it’s value down Best thing to do would be to lie
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CHAPTER 13 Balance of Payments is broken up into 3 different accounts: 1. Current Account 2. Capital Account 3. Official Settlements Account Summarizes all those transactions by individuals, firms, and governments of one country w/ their counterparts in the other. -Measure of openness of a particular economy
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ECON 340 Class Notes Ch 12-15 - ECON 340 Class Notes...

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