741991
| Question | Answer |
| Foreign Exchange Market | the market in which the currency of one country is exchanged for the currency of another |
| Exchange Rate | the price at which one currency exchanges for another |
| A fall in the value of one currency vs. another is currency ______ | A fall in the value of one currency vs. another is currency depreciation |
| A rise in value of one currency vs. another currency is currency _________ | A rise in value of one currency vs. another currency is currency appreciation |
| When people who are holding US$ want to exchange it for CA$, they | o Demand CA$ o Supply US$ |
| The quantity of CA$ that traders plan to buy in the foreign exchange market depends on | o The exchange rate o World demand for Canadian exports o Interest rates in Canada and other countries o The expected future exchange rate |
| the higher the exchange rate (the price of CA$), the _______ is the quantity of CA$ demanded in the foreign exchange market | the higher the exchange rate (the price of CA$), the smaller is the quantity of CA$ demanded in the foreign exchange market |
| Why is the demand curve for Canadian dollars downward sloping? | o Exports effect o Expected profit effect |
| Exports Effect | A lower exchange rate (depreciation of CA$) lowers the price of our goods for foreigners, so they buy more |
| Expected Profit Effect | The larger the expected profit from holding Canadian dollars, the greater is the quantity of Canadian dollars demanded today |
| As the price does up, the quantity demanded goes _____ | As the price does up, the quantity demanded goes down |
| The supply curve for CA$ is the relationship between __________ and ___________ | The supply curve for CA$ is the relationship between the exchange rate and quantity of CA$ supplied |
| Why is the supply curve for Canadian dollars sloping upward? | o Imports effect o Expected profits effect |
| Imports Effect | A higher exchange rate (appreciation of CA$) lowers the price of foreign goods from our perspective |
| Expected Profit Effect | • For a given expected future Canadian dollar exchange rate, the lower the current exchange rate, o The greater is the expected profit from holding Canadian dollars o The smaller is the quantity of CA$ supplied on the foreign exchange market |
| The higher the price, the ______ the quantity supplied | The higher the price, the higher the quantity supplied |
| If the exchange rate is too high, a ______ of Canadian dollars drives it ______ | If the exchange rate is too high, a surplus of Canadian dollars drives it down |
| If the exchange rate is too low, a _______ of Canadian dollars drives it ______ | If the exchange rate is too low, a shortage of Canadian dollars drives it up |
| Changes in things other than the exchange rate will shift the demand curve for CA$ | o World demand for Canadian exports o Canadian interest rate vs foreign interest rates o The expected future exchange rate |
| World Demand for Canadian Exports | • At a given exchange rate, if world demand for Canadian exports increases o The demand for dollars increases o The demand curve for CA$ shifts rightward |
| Canadian Interest Rate vs Foreign Interest Rates | • Canadian Interest Rate Differential o The demand for dollars increases o The demand curve for Canadian dollars shifts rightward |
| Canadian Interest Rate Differential | the Canadian interest rate minus the foreign interest rate |
| Expected Future Exchange Rate | • At a given current exchange rate, if the expected future exchange rate for CA$ rises o The demand for CA$ increases and the demand curve for dollars shifts rightward |
| Changes in anything other than the exchange rate will shift the supply curve | o Canadian demand for imports o Canadian interest rate differential o The expected future exchange rate |
| Canadian Demand for Imports | • At a given exchange rate, if the Canadian demand for imports increases o The supply of CA$ on the foreign exchange market increases o The supply curve of CA$ shifts rightward |
| Canadian Interest Rate Differential | • If the Canadian interest rate differential rises o The supply for CA$ decreases o The supply curve of Canadian dollars shifts leftward |
| Expected Future Exchange Rate | •At a given current exchange rate, if the expected future exchange rate for CA$ rises o The supply of CA$ decreases and the supply curve for CA$ shifts leftward |
| Arbitrage | Buying at a low price on one market and selling at a high price in another |
| Interest Rate Parity | indifferences to interest rates available on deposits in two countries, e.g. equal rates of return |
| Purchasing Power Parity (PPP) | when two quantities of money can buy the same quantity of goods and services, which means equal value of money |
| Nominal Exchange Rate | the value of a domestic currency expressed in units of foreign currency |
| Real Exchange Rate | the relative price of domestically-produced goods and services to foreign-produced goods and services |
| Real Exchange Rate Equation | Real Exchange Rate=E ×( P/(P*)) |
| Real Exchange Rate in the Short-Run Equation | RER=E×( P/(P*) ) |
| Real Exchange Rates in the Long-Run Equation | E=RER ×( (P*)/P ) |
| 3 possible exchange rate policies are | o Flexible exchange rate o Fixed exchange rate o Crawling peg |
| Flexible Exchange Rate | permits the exchange rate to be determined by demand and supply with no direct intervention in the foreign exchange market by the central bank |
| Fixed Exchange Rate | pegs the exchange rate at a value decided by the government or central bank and that block the unregulated forces of demand and supply by direct intervention in the foreign market |
| If demand increases, the Bank of Canada _____ CA$. This _____ supply and moves equilibrium back | If demand increases, the Bank of Canada sells CA$. This increases supply and moves equilibrium back |
| Crawling Peg | a policy that selects a target path for the exchange rate with intervention in the foreign exchange market to achieve that path |
| Balance of Payments Account | records a country’s international trading, borrowing, and lending |
| 3 Balance of Payments Accounts | o Current account o Capital account o Official settlements account |
| Current Account | Keeps track of new flows of money resulting from purchases of goods and services |
| Current Account Balance Equation | Current Account Balance = exports - imports + net interest income + net transfers |
| Inflows | exports, interest received on foreign assets, transfers to Canada |
| Outflows | imports, interest paid on assets held by foreigners, transfers to other countries |
| Capital Account | Keeps track of net flows of money resulting from the purchase and sale of real or financial assets |
| Official settlements account | Keeps track of Government holdings of foreign currencies |
| The sum of the balances of the three accounts always _____ | The sum of the balances of the three accounts always equal zero |
| A country that is borrowing more from the rest of the world than it is lending to it is called a _______ | A country that is borrowing more from the rest of the world than it is lending to it is called a net borrower |
| A country that is lending more to the rest of the world than it is borrowing from it is called a _______ | A country that is lending more to the rest of the world than it is borrowing from it is called a net lender |
| Debtor Nation | a country that during the sum of its history has borrowed more from the rest of the world than it has lent to it |
| Creditor Nation | a country that has invested more in the rest of the world than other countries have invested in it over its history |
| Investment and Savings Equations | (X-M)=(S-I)+(T-G) Net Exports = Private Sector Balance + Government Balance |
| Current Account Balance Equation | CAB=NX+Net interest income+Net transfers |
| Exchange Rate and the Balance of Payments in the Short-Run | o A fall in the nominal exchange rate lowers the real exchange rate o Our imports are more costly and our exports more competitive X – M rises Current account deficit falls (or surplus rises) |
| Exchange Rate and the Balance of Payments in the Long-Run | o A change in the nominal exchange rate leaves the real exchange rate unchanged The nominal exchange rate plays no role in influencing the current account balance in the long run |
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