Hand-written and detailed notes for floating exchange rates in the macroeconomy, with graphs and diagrams, and stakeholders and complete explanation for IBDP economics HL
foreign exchange
↳
International transactions involve the use
of different currencies
,
known as
foreign exchange
A The demand for foreign currencies
generates a
supply of domestic currency & demand
for domestic
currency
generates a
supply of foreign currencies
demand supply of domestic currencies
for foreign currencies >
-
demand
for domestic
currency
-
>
Supply of foreign currencies
Rate
Exchange :
the value of one currency expressed in terms of another
·
Exchangerateyatyn e
flexible exchange
rate system
by Market
forces (demand /supply) with no
govt /central bank intervention EU residents who
↑
-
,
sell Euros to
N Sof $ A sof E
buy $ to
import,
Excess
Supply Excess & Supply invest , travel
- -
0 .
80 me 2 -
00
-
# ↓
Market
for Market
for Euros (E)
-
67
&
0 . 1 56.
Us Dollars
0 .
5 0 125
~ u
Excess US residents who
Excess
demand
Demand E Demand I Euros
D for $
Dog E
7 >
Ea Sty of $ Oty of E
Demand for $ will come
from Eurozone residents who · According to Market Equilibrium
need Us Dollars
for transactions with the US/VS firms 1$ = 0 67 E .
↳ Investors It 1 $
Importers Tourists etc = .
50
, , ,
DownwardSloping D Po$ In
as the terms of t increases , i
floating exchange rate
=
In . a
Eurozone residents demandfewer Us dollars system ,
the Eer Is determined
by
Upward slopings as the Po$ in terms of increases
, demand /supply where the
Sty of
-
=
a
Eurozone US dollars
goods
become
cheaper ,
more are
Currency demanded =
Sty of a
currency
supplied exports Supplied bank
as increase
, wo any govt/central
-
interventiou
, Once exchange rate settles at 15 Equilibrium it demand
an ,
can be changed by shifts in the
or
supply of the
Currency :
*
Appreciation : An increase in the value of a
currency in the
floating exchange
rate
system
*
Depreciation : A decrease in the value
of a
currency in the
floating exchange rate
system
Rightward Stft in Demand Curve for $
=
Appreciates (As$Supply remains the same)
Leftward Shift Supply Curve
for $
Appreciates /As $ Demand the same
=
in remains
Lytward Shift In Demand Curve
for $ $Depreciation
=
(As $ Supply remains the same)
Rightward Shift in
Supply Curve
for $ =
$Depreciation (As $Demand remains the same
Causes of Changes In Exchange Rates
I
Changes In Currency Demand-factors that lead to in flow of funds into a
country
A Exports & Factors
Affecting Exports
↑ Demand
·
Foreign Demand
for Exports :
for Exports ,
Demand
for domestic currency (right shyt) ,
Domestic
Currency Appreciates & vice versa
Demand Services like ↑ Tourists
Foreign for Tourism demand (right)
·
for domestic currency D C
Appreciates
: .
,
,
·
Rate of Inflation Relative to other countries : x rate of Inflation exports ,
become
cheaper for foreigners .
↑
Exports,
to other countries
compared Domestic Currency Appreciates & vice versa
Relative Growth Rates :
·
Growth of Foreign Country ,
incomes in Foreign Country ,
↑ Demand
for Exports from Country B
,
↑ Demand for Country B's domestic currency ,
B's currency Appreciates & vice versa
B
. Investment &
factors affecting Investment
·
Inward Investments
by Foreigners In both :
If the investment is inward (coming into the
country),
(FDIs] Foreign Direct Investments Pattalio Investment then ↑ Demand
for Currency
Domestic &
if
Investments by Multinational Financial Investments like investments ↓ demand for ,
domestic
currency
corporations in
productive facilities purchase of stocks bonds,
·
Relative Interest Rates Interest Rates 4 In How of Finanual Investments ↑ Demand
for Domestic Carency
foreign
:
, ,
compared to other countries Such as
Savings Deposits): D C
Appreciates & vice versa
.
.
bonds which depend on the Rol
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller jaanamanand. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for £8.06. You're not tied to anything after your purchase.
