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45 Cards in this Set

  • Front
  • Back

Foreign Currency

Money of other countries regardless of whether that money is in the form of notes, coins, or bank deposits.

Foreign Exchange Market

Where the currency of one country is exchanged for the currency of another.

Exchange Rate

The price at which one currency exchanges for another currency in the foreign exchange market.

Foreign Exchange Market

-Competitive market


-An exchange rate is a price

Demand in FEM

Quantity of Canadian dollars demanded depends on:


-Exchange Rate


-World demand for Canadian exports


-Interest ages in Canada and other countries


-Expected future exchange rate

Law of Demand for FE

Higher the exchange rate, the smaller the quantity of Canadian dollars demanded in the FEM.

Exports Effect

Larger the value of Canadian exports, the larger the quantity of Canadian dollars demanded in the FEM.

Expected Profit Effect

Larger the expected profit from holding Canadian dollars, the greater is the quantity of Canadian dollars demanded in the FEM.

Demand Curve for Canadian Dollars

Back (Definition)

Supply in the FEM

The quantity of Canadian dollars supplied in the FEM depends on:


-The exchange rate


-Canadian demand for imports


-Interest rates in Canada and other countries


-The expected future exchange rate

Law of Supply of FE

Higher the exchange rate, the greater is the quantity of Canadian dollars supplied in the FEM.

Imports Effect

Larger the value of Canadian imports, the larger is the quantity of Canadian dollars supplied in the FEM.

Expected Profit Effect

The higher the exchange rate today, the later is the expected profit from selling Canadian dollars today and holding foreign currencies, so the greater is the quantity of Canadian dollars supplied.

Supply Curve for Canadian Dollars

Back (Definition)

Market Equilbrium

Depends on how the Bank Of Canada and other central banks operate. At equilibrium exchange rate there is nether a shortage nor a surplus.

Equilibrium Exchange Rate

Change in Demand for Canadian Dollars

Changes when there is a change in:


-World demand for Canadian exports


-Canadian interest rate relative to the foreign interest rate


-The expected future exchange rate

Canadian Interest Rate Differential

Canadian interest rate - Foreign interest rate


(Creates the differential gap)

Changes in Demand for Canadian Dollars

Back (Definition)


Graph

Change in Supply of Canadian Dollars

Changes when there is a change in:


-Canadian demand for imports


-Canadian interest rate relative to the foreign interest rate


-The expected future exchange rate

Changes in the Supply of Canadian Dollars

Back (Definition)

Changes in the Exchange Rate

If demand for Canadian dollar increases and the supply doesn't change, the exchange rate rises.


If supply of Canadian dollars increases and the demand doesn't change, the exchange rate falls.

Arbitrage

Removes profit from borrowing in one currency and lending in another and buying goods in one currency and selling them in another. It ensures that the exchange rate is the same in all trading centres. It brings about:


-Interest rate parity


-Purchasing power parity

Interest Rate Parity

Equal rates of return. Funds move to et the highest expected return available.

Purchasing Power Parity

Equal value of money.

Real Exchange Rate

Relative price of Canadian-produced goods and services to foreign produced goods and services.


RER=(E x P) / P*

Short Run

If nominal exchange rate changes the real exchange rate also changes.

Long Run

The nominal exchange rate and the price level are determined together and the real exchange rate does not change when the nominal exchange rate changes.

Exchange Rate Policy

3 policies are:


-Flexible exchange rate


-Fixed exchange rate


-Crawling peg

Flexible Exchange Rate

Exchange rate that is determined by demand and supply in the FEM with no direct intervention by the central bank.

Fixed Exchange Rate

Exchange rate that is determined by a decision of the government or the central bank and is achieved by central bank intervention in the FEM to block the unregulated forces of demand and supply.

Crawling Peg

Exchange rate that follows a path determined by a decision of the government or the central bank and is achieved in a similar way to a fixed exchange rate by central bank intervention in the FEM.

Balance of Payments Account

Records international trading, borrowing, and lending in 3 accounts:


-Current account


-Capital and financial account


-Official settlements account

Current Account

Records receipts from exports of goods and services sold abroad, payments for imports of goods and services from abroad, net interest income paid abroad, and net transfers abroad.


(Exports - Imports, Net Interest Income, Net Transfers)

Capital & Financial Account

Records foreign investment in Canada minus Canadian investment abroad.

Official Settlements Account

Records the change in Canadian official reserves, which are the government's holdings of foreign currency.


(If reserves increase, account is negative. If reserves decrease, account is positive. The sum of the balances on the 3 accounts always equals zero.)

Net Borrower

A country that is borrowing more from the rest of the world than it is lending to the rest of the world.

Net Lender

A country that is lending more to the rest of the world than it is borrowing from the rest of the world.

Debtor Nation

A country that during its entire history has borrowed more from the rest of the world than it has lent to it.

Creditor Nation

A country that during its entire history has invested more in the rest of the world than other countries have invested in it.

Current Account Balance

CAB= NX + Net interest income + Net transfers

Net Exports

Exports of goods and services minus imports of goods and services.

Government Sector Balance

Equal to net taxes minus gene met expenditure on goods and services.

Private Sector Balance

Saving minus investment.

Exchange Rate

Short Run: A fall in dollar lowers real exchange rate, Canadian imports are more costly and exports more competitive.


Long Run: A change in nominal exchange rate leaves the real exchange rate unchanged and plays no role in influencing the current accout balance.