Shared Flashcard Set

Details

G345 Topic 11
Foreign Exchange Rates
27
Business
Undergraduate 2
11/26/2012

Additional Business Flashcards

 


 

Cards

Term
Exchange Rate definition
Definition
The price of one currency in terms of another
Term
Foreign Exchange Market
Definition
The financial market where exchange rates are determined
Term
Spot Transactions
Definition
Immediate (two-day) exchange of bank deposits
- Spot Transaction Rate
Term
Forward Transaction
Definition
The exchange of bank deposits at some specified future date
- Forward Exchange Rate
Term
Appreciation and Depreciation Definitions
Definition
Appreciation: a currency rises in value relative to another currency

Depreciation: a currency falls in value relative to another currency
Term
What happens when a country's currency appreciates?
Definition
The country’s goods abroad become more expensive and foreign goods in that country become less expensive and vice versa
Term
Law of One Price
Definition
The theory that the price of a given security, commodity or asset will have the same price when exchange rates are taken into consideration
Term
Theory of Purchasing Power Parity Assumptions
Definition
– All goods are identical in both countries
– Trade barriers and transportation costs are low
– Many goods and services are not traded across borders
Term
Theory of Purchasing Power Parity
Definition
An economic theory and a technique used to determine the relative value of currencies, estimating the amount of adjustment needed on the exchange rate between countries in order for the exchange to be equivalent to (or on par with) each currency's purchasing power.
Term
4 Factors that affect exchange rates in the long-run
Definition
• Relative price levels
• Trade barriers
• Preferences for domestic versus foreign goods
• Productivity
Term
When the Domestic Price level increases, what happens to the exchange rate?
Definition
Decreases
Term
When the Trade barriers increase, what happens to the exchange rate?
Definition
Increases
Term
When the Import Demand increases, what happens to the exchange rate?
Definition
Decreases
Term
When the Export Demand increases, what happens to the exchange rate?
Definition
Increases
Term
When the Productivity increases, what happens to the exchange rate?
Definition
Increases
Term
What type of analysis is used to determine exchange rates in the short-run?
Definition
Supply/Demand Analysis
Term
Describe the supply curve in the short-run for domestic assets
Definition
It is vertical, the amount of domestic assets is fixed
Term
What is the most important determinant of the demand curve for domestic assets
Definition
The relative expected return of domestic assets
Term
What 3 rates shift the demands of domestic assets?
Definition
– Domestic interest rate
– Foreign interest rate
– Expected future exchange rate
Term
When the domestic interest rate rises, what happens to the exchange rate?
Definition
Increases (demand shifts to the right)
Term
When the foreign exchange rate increases, what happens to the Overall Exchange rate?
Definition
Decreases (shifts to the left)
Term
When the expected future interest rate increases, what happens to the exchange rate?
Definition
Increases (demand shifts to the right)
Term
Factors that shift the Demand Curve for Domestic Assets
Definition
Domestic Interest Rate (positively)
Foreign Interest Rate (Negatively)
Expected Domestic Price Level (Negatively)
Expected Trade Barriers (Positively)
Expected Import Demand (Negatively)
Expected Export Demand (Positively)
Expected Productivity (Positively)
Term
What happens when the domestic interest rate rises due to inflation?
Definition
The currency depreciates
Term
What is the Effect of a rise in the Money supply?
Definition
Dollar depreciates a lot, then appreciates to equilibrium
Term
Money Neutrality
Definition
In the long-run, a one-tome percentage in the rise in the money supply is matched by the same one-time percentage rise in the price level
Term
When is the exchange rate more volatile?
Definition
In the short-run
- Helps to explain why exchange rates exhibit so much volatility
Supporting users have an ad free experience!