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.”
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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
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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. goods, and hence the
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This note was uploaded on 10/07/2010 for the course FIN 4173N taught by Professor Spencer during the Spring '10 term at Dowling.

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

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