Lesson10 - • Loss of capital from the country? •...

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Lesson 10: Understanding Foreign Exchang In this lesson we examine the nature of foreign exchange and the functioning of foreign exchange markets. Suggested reading: RSU chapter 10
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The Foreign Exchange Market Quantity of Foreign Currency Exchange rate $/FE Demand Supply E F* P* Nothing affects the price except as it affects supply and/or demand
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Fundamental Forces Affecting Supply and Demand Demand for foreign exchange Demand for imports Level and rate of growth of real income Relative price of imports Other Supply of foreign exchange Supply of exports Demand for exports by foreigners Relative price of exports Other
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Misguided Foreign Exchange Policies Concern with the balance of payments – comparing sales to with purchases by foreigners; what about the capital account? Let’s not confuse cause and effect! Dangerous dependence on foreign debt- holders?
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Unformatted text preview: • Loss of capital from the country? • Supporting or pegging the rate of exchange? The Effect of Price Controls Quantity of Foreign Currency Exchange rate $/FE Demand 1 Supply E 1 F* P* Demand 2 E 2 F 2 F 3 P 2 (F*-F 3 ) is the shortage in foreign exchange self fulfilling speculation Historical Perspective • The appeal of fixed rates and Bretton Woods • Recurrent balance of payments crises!! • Fear of floating rates • The demise of the pseudo-gold standard • Experience with floating rates – clean versus dirty floats Dynamic and Speculative Forces Affecting Supply and Demand • Foreign exchange as an investment – a speculative proposition • Movements short term and long term – trends versus noise? • The appeal of currency standardization – The Euro – Dollarization – the cure for inflation?...
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This note was uploaded on 09/23/2011 for the course FIN 6320 taught by Professor Lewin during the Summer '11 term at University of Texas at Dallas, Richardson.

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Lesson10 - • Loss of capital from the country? •...

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