Decrease in demand for and increase in supply of

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foreign inancial assets, this results in capital lows into domesic assets. Decrease in demand for and increase in supply of foreign currency. Supply curve right and demand curve let, results in fall in exchange rate (appreciaion of domesic) (real interest rate may be more appropriate) Growth rates If domesic growth rate is higher, imports grow fast than exports. Rise in domesic and foreign income causes a rise in demand for and supply of imports and exports, respecively, even with no change in prices. Demand for foreign exchange, grows faster than supply, net impact is rise in exchange rate (depreciaion of domesic currency). May also afect capital lows, more growth generally means more proitability, which makes domesic assets more appealing and diverts funds into domesic assets, supply of foreign exchange rises faster than demand and the exchange rate falls. Government Macroeconomic policy: government can inluence inlaion, interest rates and growth Also can afect supply and demand through trade barriers (tarifs and quotas) and taxes. These change prices and return on domesic assets. Also can be central bank intervenion Central bank signaling can cause market paricipants to follow suit in order to reap proits Expectaions Speculators may act on future expectaion of interest rates May also act on expectaions of any factors above Speculaive atacks may occur on currencies Exchange-rate systems/arrangements (a) Flexible Distributing prohibited | Downloaded by K C ([email protected]) lOMoARcPSD|2330446
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ER determined in an open market by way of supply and demand, lexible does not mean that it is always changing, just that it is open to changing without intervenion or regulaion by the government or other monetary authority. Also known as a loaing exchange rate. (b) Fixed Government or monetary authority sets price of domesic currency in terms of foreign currency or currencies and stands willing to support the quoted price. If muliple countries agree to ix their currencies then this would be a system of ixed ERs. Need to be internally consistent or arbitrage would occur. Normally ixed to a currency/commodity/basket of currencies. If ixed to a certain currency and this currency is loaing, may be also seen to be loaing. Usually the rate is ixed below equilibrium (overvalued – direct quote). If undervalued, there is excess demand for the currency and the government must support this by using reserves, which will run out fast. Instead of this may change domesic economic policy, reducing demand is easier than increasing supply. Can also use foreign exchange controls or inancial market controls. People that are willing to pay more for the currency than what is quoted may get involved in corrupion or bribery. This can shit supply, losing advantages. If ixed is overvalued the country accumulates reserves, uses expansionary policy and Fx incenives.
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