International Economics
https://docs.google.com/presentation/d/1zyBOZnm_DfaLw44dQ0ezXX6qgiNZgSs2JxugG-
Rn2aY/edit#slide=id.g78163f9991_0_20
Exchange Rates
An exchange rate is the price of one currency expressed in terms of another.
1. Fixed- one currency is fixed in value against another. They give certainty but can cost
large sums of foreign exchange.
2. Floating- market forces determine the exchange rate based on a country’s trade
performance and economics and political stability
3. Managed/ dirty float- The rate is floating but between the upper and lower limits the
domestic government keeps it to. Stability at less cost to national reserves.
Floating
Where the value of the currency is determined by market forces- demand for and supply of the
currency in the foreign exchange market; any change in these changes the exchange rate. No
govt intervention.
Appreciation: an increase in the value of a country's currency in the forex market
Depreciation: a decrease in the value in the forex market
Suppliers of currency:
Foreign consumers who buy domestic goods
Foreign investors who invest in domestic assets
Foreign governments and central banks
The demand for a country’s currency comes from Foreigners who wish to buy the currency,
travel to your country for work or tourism, or to save/ invest in the country.
The Supply of the currency comes from the citizens of that country who wish to buy goods or
services of another country, travel to the other country, or save/ invest in that country.
3.2 Determination of freely floating exchange rates…
Where the value of the currency is determined by market forces- demand for and supply of the
currency in the foreign exchange market
, Considering that European consumers’ demand for American products increases, this causes
the Demand for the American Dollar in Europe to increase.
But in order to acquire more US goods, and the dollars needed to buy those goods, Europeans
must increase their supply of Euros in the US Market.
If a factor causes a shift outwards in the Blue Line in the first graph, it will likewise cause a shift
outwards of the blue line on the graph on the bottom.
In the same way, a shift outwards in the green line on the graph on the bottom would cause a
shift outwards in the green line on the top graph (for example if American investors wanted to
invest in European assets, see below).
https://docs.google.com/presentation/d/1zyBOZnm_DfaLw44dQ0ezXX6qgiNZgSs2JxugG-
Rn2aY/edit#slide=id.g78163f9991_0_20
Exchange Rates
An exchange rate is the price of one currency expressed in terms of another.
1. Fixed- one currency is fixed in value against another. They give certainty but can cost
large sums of foreign exchange.
2. Floating- market forces determine the exchange rate based on a country’s trade
performance and economics and political stability
3. Managed/ dirty float- The rate is floating but between the upper and lower limits the
domestic government keeps it to. Stability at less cost to national reserves.
Floating
Where the value of the currency is determined by market forces- demand for and supply of the
currency in the foreign exchange market; any change in these changes the exchange rate. No
govt intervention.
Appreciation: an increase in the value of a country's currency in the forex market
Depreciation: a decrease in the value in the forex market
Suppliers of currency:
Foreign consumers who buy domestic goods
Foreign investors who invest in domestic assets
Foreign governments and central banks
The demand for a country’s currency comes from Foreigners who wish to buy the currency,
travel to your country for work or tourism, or to save/ invest in the country.
The Supply of the currency comes from the citizens of that country who wish to buy goods or
services of another country, travel to the other country, or save/ invest in that country.
3.2 Determination of freely floating exchange rates…
Where the value of the currency is determined by market forces- demand for and supply of the
currency in the foreign exchange market
, Considering that European consumers’ demand for American products increases, this causes
the Demand for the American Dollar in Europe to increase.
But in order to acquire more US goods, and the dollars needed to buy those goods, Europeans
must increase their supply of Euros in the US Market.
If a factor causes a shift outwards in the Blue Line in the first graph, it will likewise cause a shift
outwards of the blue line on the graph on the bottom.
In the same way, a shift outwards in the green line on the graph on the bottom would cause a
shift outwards in the green line on the top graph (for example if American investors wanted to
invest in European assets, see below).
