ch26 - The Exchange Rate Currencies and Exchange Rates...

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Chapter 26 The Exchange Rate Currencies and Exchange Rates Foreign notes, coins, and bank deposits are called foreign currency . The foreign exchange market is the market in which the currency of one country is exchanged for the currency of another. The foreign exchange rate is the price at which one currency trades for another. Currency depreciation is a fall in the value of one currency in terms of another currency. Currency appreciation is the rise in the value of one currency in terms of another currency. We can express the value of the Canadian dollar in terms of any currency—called cross exchange rates. The Foreign Exchange Market The exchange rate is determined by demand and supply in the foreign exchange market. The quantity of Canadian dollars demanded in the foreign exchange market is the amount that traders plan to buy during a given time period at a given exchange rate. This quantity depends on many factors but the main ones are: o The exchange rate o World demand for Canadian exports o Interest rates in Canada and other countries o The expected future exchange rate The law of demand for foreign exchange states that other things remaining the same, the higher the exchange rate, the smaller is the quantity of Canadian dollars demanded on the foreign exchange market. The exchange rate influences the quantity of dollars demanded for two reasons: o Exports effect o Expected profit effect
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Exports effect: o The lower the exchange rate, the cheaper are Canadian-produced goods to foreigners, and the greater the level of exports, the greater the quantity of Canadian dollars demanded on the foreign exchange market Expected profit effect: o The lower the exchange rate, the larger the expected profit from buying
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ch26 - The Exchange Rate Currencies and Exchange Rates...

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