Ch18 - 2009-11-22 The International Financial System 1...

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2009-11-22 1 The International Financial System 1 Exchange Rate Systems Floating currency The outcome of a country allowing its currency’s Learning Objective 18.1 exchange rate to be determined by demand and supply. Exchange rate system An agreement among countries on how exchange rates should be determined. 2
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2009-11-22 2 Exchange Rate Systems Managed float exchange rate system The current exchange rate system under which the value of Learning Objective 18.1 system, under which the value of most currencies is determined by demand and supply, with occasional government intervention. Fixed exchange rate system A system under which countries agree to keep the exchange rates among their currencies fixed. 3 The Current Exchange Rate System Learning Objective 18.2 The current exchange rate system has three important aspects: 1 The United States allows the dollar to float against other major currencies. 2 Most countries in Western Europe have adopted a single currency, the euro . Euro The common currency of many European countries. 3 Some developing countries have attempted to keep their currencies’ exchange rates fixed against the dollar or another major currency. 4
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2009-11-22 3 The Current Exchange Rate System Learning Objective 18.2 The Floating Dollar FIGURE 18-1 U.S. Dollar–Canadian Dollar and U.S. Dollar–Yen Exchange Rates, 1973–2006 Dollar Yen Exchange Rates, 1973 2006 5 Learning Objective 18.2 The Toronto Blue Jays Gain from the Rising Value of the Canadian Dollar Making the Connection The Toronto Blue Jays have benefited from the rising value of the Canadian dollar. 6
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2009-11-22 4 The Current Exchange Rate System Learning Objective 18.2 The Theory of Purchasing Power Parity What Determines Exchange Rates in the Long Run? Purchasing power parity The theory that in Three real-world complications keep purchasing power parity from being a complete explanation of exchange rates, even in the long run: • Not all products can be traded the long run, exchange rates move to equalize the purchasing powers of different currencies.
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Ch18 - 2009-11-22 The International Financial System 1...

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