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Ch04 PP 06

# Ch04 PP 06 - Chapter 4 Exchange Rate Equilibrium An...

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Value of £ Quantity of £ D: Demand for £ \$1.55 \$1.50 \$1.60 S: Supply of £ equilibrium exchange rate Chapter 4 Exchange Rate Equilibrium An exchange rate represents the price of a currency, which is determined by the demand for that currency relative to the supply for that currency.

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Measuring Exchange Rate Movements An exchange rate measures the value of one currency in units of another currency. When a currency declines in value, it is said to depreciate . When it increases in value, it is said to appreciate . On the days when some currencies appreciate while others depreciate against the dollar, the dollar is said to be “mixed in trading.”
Measuring Exchange Rate Movements The percentage change (% ∆ 29 in the value of a foreign currency is computed as S t – S t -1 \$.52-\$.50 = 4% S t -1 \$.50 where S t denotes the spot rate at time t . A positive % represents appreciation of the foreign currency, while a negative % represents depreciation.

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1.40 1.45 1.50 1.55 1.60 1.65 1.70 1.75 1.80 1992 1996 2000 Approximate Spot Rate of £ \$ 5600 5800 6000 6200 6400 6600 6800 7000 1992 1996 2000 Approximate £ that could be Purchased with \$10,000 £ -20 -15 -10 -5 0 5 10 15 20 1992 1996 2000 Approximate Annual % % Fluctuation of the British Pound Over Time
\$/£ Quantity of £ S 0 D 0 r 0 U.S. inflation U.S. demand for British goods, and hence demand of £ D 1 r 1 S 1 Factors that Influence Exchange Rates Relative Inflation Rates British desire for U.S.

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Ch04 PP 06 - Chapter 4 Exchange Rate Equilibrium An...

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