EC1301_-_Lecture_12_-_The_World_of_International_Finance

EC1301_-_Lecture_12_-_The_World_of_International_Finance -...

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1 EC1301 The World of International Finance  ©  Connie CHUNG  LECTURE 12 THE WORLD OF INTERNATIONAL  FINANCE
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2 EC1301 The World of International Finance  ©  Connie CHUNG  Agenda How exchange rates are determined How changes in demand and supply of currencies affect  equilibrium exchange rates Factors that shift the demand curve for a currency  Factors that shift the supply curve of a currency An economy’s accounts of its international transactions The current account The financial account The capital account How governments influence the exchange rate:  foreign exchange  market intervention Exchange rate systems Fixed exchange rate system Flexible exchange rate system Capital market liberalization and financial crises
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3 EC1301 The World of International Finance  ©  Connie CHUNG  Address the Following Questions 1. If USA  interest rates  increase, how will this affect the  exchange rate between USA dollars and euros? What  will increasing interest rates in the USA do to the cost  of a trip to Europe for a USA resident ? 2. If the Singapore dollar increases in value against the  Japanese yen, how will the increase affect the  balance  of trade  between Singapore and Japan? 3. Why do governments intervene in the  foreign  exchange market  by buying and selling currencies? 4. Why has a group of European countries adopted a  common currency ? 5. How do  international financial crises  emerge?
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4 EC1301 The World of International Finance  ©  Connie CHUNG  Key Terms appreciation of a currency balance of payments deficit balance of payments surplus capital account current account depreciation of a currency euro financial account fixed exchange rates flexible exchange rates foreign exchange market intervention revaluation devaluation exchange rate
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5 EC1301 The World of International Finance  ©  Connie CHUNG  How Exchange Rates are Determined The  exchange rate  is defined as the price  at which currencies trade for one another  in the market Fluctuations in the exchange rate can  have a huge impact on what countries  import, export and the overall  trade  balance
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6 EC1301 The World of International Finance  ©  Connie CHUNG  Appreciation  versus  Depreciation An increase in the value of a currency relative to  the currency of another nation is called an  appreciation   of a currency    When the Singapore dollar appreciates against the        Malaysian ringgit, one dollar will purchase more ringgit A decrease in the value of a currency relative to  the currency of another nation is called a  depreciation   of a currency If one currency appreciates, the other must  depreciate
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