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MTSU Econ 3210 - Chapter 8

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Stuart Fowler

on 21 October 2014

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Transcript of MTSU Econ 3210 - Chapter 8

Chapter 8, The Market for Foreign Exchange
Foreign Currency
Nominal Exchange Rates
How are Exchange Rates Quoted?
Where are FX Markets?
Theories of Exchange Rates
The Market for FX
Foreign currency are other contries money supply. It thus includes currency, coin, and demand deposits
EX: Canadian dollar, Brazillian Real,
Chinese Yuan, Euro
Def: the nominal exchange rate is the price of one currency in terms of another currency; also called the exchange rate.
Note: Fluctuations in the exchange rate between the dollar and foreign currencies affect the prices that U.S. consumers pay for foreign imports. And, prices they pay for U.S. goods.
Def: Appreciation is an increase in the value of a currency in exchange for another currency.
Depreciation is a decrease in the value of a currency in exchange for another currency.
Q:What happened in the article?
Why Should we Care about Fluctuations in Exchange Rates?
EX: The Sony story:
Real Exchange Rates
In our example:
The demanders of dollars are Japanese households and firms who want to buy American PRODUCTS and FINANCIAL ASSETS.
The suppliers of dollars are American households and firms who want to buy Japanese PRODUCTS and FINANCIAL ASSETS.

More Specifically, suppose X-box is $300, Playstation is 27,000Yen, and indirect exchange rate is 90Yen/$. Assume Microsoft wants dollars and Sony wants Yen. Prices don't change regardless of exchange rate.
Q: What is the cost of a playstation for an American consumer? What is the cost of an X-box for a Japanese Consumer?

Q: Suppose Yen appreciates so that the exchange rate is now 80Yen/$. What is the cost of a playstation for an American consumer? What is the cost of an X-box for a Japanese Consumer?
Result: When Yen appreciates (dollar depreciates), American goods become less expensive for Japanese consumers. Japanese goods become more expensive for American consumers.
The quantity demand of dollars by the Japanese rises.
The quantity supply of dollars by the Americans falls.
Q: Suppose demand for IPads increase in Japan.
Q: Suppose demand for Sony TV's increase in USA .
Graph shows exchange rate of US dollar relative to its trading partners. Dollar depreciated from 2002 to 2007 as investors liked overseas investments. World wide recession hit in 2008 causing investors to want safe US investments.
Read the following articles on the economic turmoil in Europe. Using our model of exchange rates, predict what should be happening to the $ relative to the euro.
Is our analysis correct?
Full transcript