chapter 9 notes

chapter 9 notes - Chapter 9 The Exchange Rate and the...

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Chapter 9: The Exchange Rate and the Balance of Payments I. Currencies and Exchange Rates a. Foreign Exchange Market: US citizens sell dollars in the foreign exchange market in order to purchase foreign currency so that they can purchase imports and purchase foreign assets b. Foreign Exchange Rates: price at which one currency exchanges for another c. US Currency Depreciation: a fall in the value of US currency in terms of another country c.i. Consequences: c.i.1. US imports are more expensive c.i.2. US exports are more affordable c.ii. Ex: exchange rate falls from 130 to 106 yen per dollar d. US Currency Appreciation: a rise in the value of US currency in terms of another country d.i. Consequences: d.i.1. US imports are more affordable d.i.2. US exports are more expensive d.ii. Ex: exchange rate rises from 106 to 130 yen per dollar e. Between 2000 and 2010 the dollar appreciated relative to the peso II. Trade Weighted Index: the average exchange rate of the US dollar against other currencies, with individual currencies weighted by their importance in US trade III. The Foreign Exchange Market a. The Demand for one Currency is the Supply of another currency. a.i. When someone wants to exchange euros for dollars they demand US dollar and supply euros a.ii. Factors that influence the demand for US dollars will influence the supply of foreign currencies and vice versa b. Law of Demand for Foreign Currency b.i. “Derived Demand” b.ii. the higher the exchange rate, the smaller is the quantity of US dollars demanded in the foreign exchange market. b.ii.1. Exports Effect – the lower the exchange rate, the lower the prices of US produced goods to foreigners and greater is the volume of US exports. – China keeping low exchange rates? b.ii.2. Expected Profit Effect: the larger the expected profit from holding US dollars the greater is the quantity of US dollars demanded. Lower exchange rates today, higher expected future profits from buying US dollars today and holding them so the greater quantity of US dollars demanded today c. Demand Curve for US Dollars – quantity of US dollars demanded is dependant on the exchange rate, movements along the curve
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c.i. A rise in the exchange rate decreases the quantity of US dollars
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chapter 9 notes - Chapter 9 The Exchange Rate and the...

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