ECON 1022 MIDTERM 2 SUMMARY NOTES

ECON 1022 MIDTERM 2 SUMMARY NOTES - ECON 1022 MIDTERM 2...

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ECON 1022 MIDTERM 2 SUMMARY NOTES: CHAPTER 25: EXCHANGE RATES AND THE BALANCE OF PAYMENTS Nominal Exchange Rate : CAN $ value expressed in foreign currency units per CAN $ Real Exchange Rate : relative price of CAN produced G/S to foreign produced G/S: (quantity of foreign country GDP that unit of CAN GDP can buy) - RER = E × (P/P*) Nominal Exchange Rate: Demand in Foreign Exchange Market: Affecting Factors: 1. Exchange Rate 2. World demand for CAN exports 3. Interest rates in CAN and other countries 4. Expected future exchange rate Quantity of CAN $ (X) and Exchange Rate (Y) 1. Quantity Demanded Increases: (fall in exchange rate) Quantity Demanded Decreases: (rise in exchange rate) With the other three influences remaining the same Expected profit increases Expected profit decreases Value of CAN exports increases Value of CAN exports decreases - Influences quantity of CAN $ by: (other things remaining the same) o Exports Effect : low exchange rate = low prices on CAN produced for foreigners = more exports o Expected Profit Effect : low exchange rate = higher profit buying CAN $ and now and saving = greater demand for CAN $ in foreign market 2. 3. 4. Demand Increases: Demand Decreases: World demand for CAN exports increases World demand for CAN exports decreases
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CAN interest rate differential increases CAN interest rate differential decreases Expected future exchange rate rises Expected future exchange rate falls Supply in Foreign Exchange Market: Affecting Factors: 1. Exchange Rate 2. CAN demand for imports 3. Interest rates in CAN and other countries 4. Expected future exchange rate Quantity of CAN $ (X) and Exchange Rate (Y) 1. Quantity Supplied Increases: (rise in exchange rate) Quantity Supplied Decreases: (fall in exchange rate) With the other three influences remaining the same Expected profit from selling increases Expected profit from selling decreases Value of CAN imports increases Value of CAN imports decreases - Influences quantity of CAN $ by: (other things remaining the same) o Imports Effect : high exchange rate = low prices on foreign produced for CAN = more imports o Expected Profit Effect : high exchange rate = profit selling CAN $ now and saving foreign $ = greater quantity CAN $ supplied 2. 3. 4. Supply Increases:
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This note was uploaded on 03/23/2010 for the course ECON 1022 taught by Professor Hammond during the Winter '10 term at UWO.

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ECON 1022 MIDTERM 2 SUMMARY NOTES - ECON 1022 MIDTERM 2...

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