F55 ER Ch02 Intenternational Monetary System

F55 ER Ch02 Intenternational Monetary System - 11/30/2010...

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11/30/2010 1 2 Chapter Two The International Monetary System Chapter Objective: This chapter introduces the institutional framework within which: International payments are made. The movement of capital is accommodated. Exchange rates are determined. Basics Economics of Exchange Rate Determinations Chapter Two Outline Evolution of the International Monetary System Current Exchange Rate Regimes European Monetary System Euro and the European Monetary Union The Mexican Peso Crisis The Asian Currency Crisis The Argentine Peso Crisis Fixed versus Flexible Exchange Rate Regimes
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11/30/2010 2 Demand For A Currency (U.S. viewpoint) l Demand (buying pressure) for foreign exchange by U.S. corporations / traders & speculators / governments that need to purchase: » foreign-produced trade items » foreign assets (real and financial). l Demand Curve / Schedule: » Relationship between the quantity of FX demanded & the price of FX (exchange rate) » Negatively sloping Supply For A Currency (U.S. viewpoint) l Supply (selling pressure) of foreign exchange by foreign corporations / traders & speculators / governments that need to purchase: » U.S.-produced trade items » U.S. assets (real or financial) l Supply Curve / Schedule: » Relationship between the quantity of FX demanded & the price of FX (exchange rate) » Positively sloping
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11/30/2010 3 Exchange Rate Equilibrium (U.S. viewpoint) Equilibrium dollar price and quantity of British Pounds are determined such that American and British goods and assets are traded. ice of BP in $ $1.55 Supply Curve for BP $1.60 Pri Quantity of BP 15 Demand Curve for BP $1.50 20 10 Changes in Macro-Economic Factors & Exchange Rates EVENTS: Increase/decrease in relative domestic inflation Increase/decrease in relative domestic interest rates Increase/decrease in relative GNP (national income) FX trading by Governments FX trading by speculators due to change in expectations EFFECTS: What happens to: EFFECTS: What happens to: The supply and demand schedules The equilibrium exchange rate / price of the foreign currency
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11/30/2010 4 The Effects of Relative Domestic Inflation Increase in the FX Market Demand Schedule : Fi d l t i l h t Foreign goods are relatively cheaper to domestic consumers. Merchandise imports increase . Quantity of FX demanded at each exchange rate increases . Supply Schedule : Domestic goods are relatively expensive for foreign consumers. e of BP in $ D2 D1 S1 S2 Merchandise exports decrease . Quantity of FX supplied at each exchange rate (ER) falls. Equilibrium: ER (price of BP) increases Pric Quantity of BP Exchanged The Effects of Relative Domestic Inflation Decrease in the FX Market Demand Schedule : Foreign goods are relatively expensive to domestic consumers.
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This note was uploaded on 04/15/2011 for the course FINA 5500 taught by Professor Staff during the Spring '08 term at North Texas.

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F55 ER Ch02 Intenternational Monetary System - 11/30/2010...

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