monecon.2018S.ch3.pdf - Chapter 3 Exchange Rates and the Foreign Exchange Market An Asset Approach 3-1 Preview The basics of exchange rates Exchange

monecon.2018S.ch3.pdf - Chapter 3 Exchange Rates and the...

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1 Chapter 3 Exchange Rates and the Foreign Exchange Market: An Asset Approach 3-2 Preview • The basics of exchange rates • Exchange rates and the prices of goods • The foreign exchange markets • The demand of currency and other assets • A model of foreign exchange markets – role of interest rates on currency deposits – role of expectations of exchange rates
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2 3-3 Key question • how are (floating) exchange rates determined ? • from simple model to ... short run (prices are given, ...) partial model; i.e. only foreign exchange market 3-4 3.1. Exchange rates (p. 65) definition? price of one currency in terms of another importance? (allow us to compare the prices of g&s of countries) strong influence on the CA and other variables quotations (Table 3-1) * direct or American domestic currency per unit of foreign currency price of the foreign currency in terms of dollars USD 0.009421 per yen * indirect or European foreign currency per unit of domestic currency price of dollars in terms of foreign currency JPY 106.15 per dollar
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3 3-5 Exchange rates (2) in exchange rate depreciation/appreciation ; relative prices ! consequences of depreciation/appreciation (of home currency) exports imports depr. appr. (See Box entitled ‘Exchange rates, auto prices, and currency wars’ on p. 69) cheaper more expensive more expensive cheaper 3-6 Depreciation and Appreciation Depreciation is a decrease in the value of a currency relative to another currency. – A depreciated currency is less valuable (less expensive) and therefore can be exchanged for (can buy) a smaller amount of foreign currency. – $1/ $1.20/ means that the dollar has depreciated relative to the euro. It now takes $1.20 to buy one euro, so that the dollar is less valuable. – The euro has appreciated relative to the dollar: it is now more valuable.
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4 3-7 Depreciation and Appreciation (cont.) Appreciation is an increase in the value of a currency relative to another currency. – An appreciated currency is more valuable (more expensive) and therefore can be exchanged for (can buy) a larger amount of foreign currency. – $1/ $0.90/ means that the dollar has appreciated relative to the euro. It now takes only $0.90 to buy one euro, so that the dollar is more valuable. – The euro has depreciated relative to the dollar: it is now less valuable. 3-8 Depreciation and Appreciation (cont.) A depreciated currency is less valuable, and therefore it can buy fewer foreign produced goods that are denominated in foreign currency. – A Nissan costs ¥2,500,000 x $0.01027/¥ = $25,672.50 – Less expensive than $27,962.50 at $0.011185/¥ A depreciated currency means that imports are more expensive and domestically produced goods and exports are less expensive. A depreciated currency lowers the price of exports relative to the price of imports.
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5 3-9 Depreciation and Appreciation (cont.) An appreciated currency is more valuable, and therefore it can buy more foreign produced goods that are denominated in foreign currency.
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  • Fall '18
  • Leo van hove
  • Exchange Rate, Foreign exchange market, United States dollar

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