4.B.EXCHANGE RATES AND THE BALANCE OF PAYMENTS
4BA: eXCHANGE rATES:
- Explain how the value of an exchange rate in a floating system is determined by the demand for, and supply of, a currency.
- Draw a diagram to show the determination of exchange rates in a floating exchange rate system.
- Calculate the value of one currency in terms of another currency.
- Calculate the exchange rate for linear demand and supply functions.
- Plot demand and supply curves for a currency from linear functions and identify the equilibrium exchange rate.
- Using exchange rates, calculate the price of a good in different currencies.
- Explain the factors that lead to changes in currency demand and supply.
- Distinguish between a depreciation of the currency and an appreciation of the currency.
- Draw diagrams to show changes in the demand for, and supply of, a currency.
- Calculate the changes in the value of a currency from a set of data.
- Evaluate the possible economic consequences of a change in the value of currency.
- Describe a fixed exchange rate system involving commitment to a single fixed rate.
- Distinguish between a devaluation of the currency and a revaluation of the currency.
- Explain, using a diagram, how a fixed exchange rate is maintained.
- Explain how a managed exchange rate operates.
- Examine the possible consequences of overvalued and undervalued currencies.
- Compare and contrast a fixed exchange rate system with a floating exchange rate system.
why: PROBLEMS ARISE IN THE CONTEXT OF INTERNATIONAL MONETARY FLOWS THAT AFFECT A COUNTRIES ECONOMIC FORTUNES
- $2.383 trillion in foreign exchange swaps per day!!!!!!
Lesson 1: Exchange rATE DETERMINATION
The demand for foreign currencies generates a supply of domestic currency; and demand for domestic currency generates a supply of foreign currencies, In a simple two-currency example using pounds and yen, it follows that:
Demand for pounds = Supply of yen
Demand for yen = Supply of pounds
Summary of the causes of changes in exchange rates:
- Foreign demand for a countries exports
- Domestic demand for imports
- Relative interest rate changes
- Relative rates of inflation
- Investment from abroad
- Changes in income
- Use of foreign currency reserves
- Exchange rates
- Currency exchange
- Floating exchange rates
- Market clearing price
- Transaction cost
Complete notes 381 to 386 in tragakes
Complete questions 1 to 17 below
Why: The exchange rate system is a key determinant of monetary flows and wealth in the global economy.
aCTIVITY 1: reflecting on the simulation
"How much harmonization is desirable"
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- Outline the role of the balance of payments.
- Distinguish between debit items and credit items in the balance of payments.
- Explain the four components of the current account.
- Distinguish between a current account deficit and a current account surplus.
- Explain the two components of the capital account.
- Explain the three main components of the financial account.
- Calculate elements of the balance of payments from a set of data.
- Explain how the current account balance is equal to the sum of the capital account and financial account balances.
- Examine how the current account and the financial account are interdependent.
- Explain why a deficit in the current account of the balance of payments may result in downward pressure on the exchange rate of the currency.
- Discuss the implications of a persistent current account deficit.
- Explain the methods that a government can use to correct a persistent current account deficit.
- Evaluate the effectiveness of the policies to correct a persistent current account deficit.
- State the Marshall–Lerner condition.
- Apply the Marshall–Lerner condition to the effect of devaluation/depreciation on the current account.
- Explain the J-curve effect, with reference to the Marshall–Lerner condition.
- Explain why a surplus in the current account of the balance of payments may result in upward pressure on the exchange rate of the currency.
- Discuss the possible consequences of a rising current account surplus.
All economic transactions between residents of the UK and the rest of the world.