Term
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Definition
| The price of one currency in terms of another |
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Term
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Definition
| The financial market where exchange rates are determined |
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Term
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Definition
Immediate (two-day) exchange of bank deposits
- Spot Transaction Rate |
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Term
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Definition
The exchange of bank deposits at some specified future date
- Forward Exchange Rate |
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Term
| Appreciation and Depreciation Definitions |
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Definition
Appreciation: a currency rises in value relative to another currency
Depreciation: a currency falls in value relative to another currency |
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Term
| What happens when a country's currency appreciates? |
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Definition
| The country’s goods abroad become more expensive and foreign goods in that country become less expensive and vice versa |
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Term
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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 |
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Term
| Theory of Purchasing Power Parity Assumptions |
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Definition
– All goods are identical in both countries
– Trade barriers and transportation costs are low
– Many goods and services are not traded across borders |
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Term
| Theory of Purchasing Power Parity |
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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. |
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Term
| 4 Factors that affect exchange rates in the long-run |
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Definition
• Relative price levels
• Trade barriers
• Preferences for domestic versus foreign goods
• Productivity |
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Term
| When the Domestic Price level increases, what happens to the exchange rate? |
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Definition
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Term
| When the Trade barriers increase, what happens to the exchange rate? |
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Definition
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Term
| When the Import Demand increases, what happens to the exchange rate? |
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Definition
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Term
| When the Export Demand increases, what happens to the exchange rate? |
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Definition
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Term
| When the Productivity increases, what happens to the exchange rate? |
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Definition
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Term
| What type of analysis is used to determine exchange rates in the short-run? |
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Definition
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Term
| Describe the supply curve in the short-run for domestic assets |
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Definition
| It is vertical, the amount of domestic assets is fixed |
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Term
| What is the most important determinant of the demand curve for domestic assets |
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Definition
| The relative expected return of domestic assets |
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Term
| What 3 rates shift the demands of domestic assets? |
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Definition
– Domestic interest rate
– Foreign interest rate
– Expected future exchange rate |
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Term
| When the domestic interest rate rises, what happens to the exchange rate? |
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Definition
| Increases (demand shifts to the right) |
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Term
| When the foreign exchange rate increases, what happens to the Overall Exchange rate? |
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Definition
| Decreases (shifts to the left) |
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Term
| When the expected future interest rate increases, what happens to the exchange rate? |
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Definition
| Increases (demand shifts to the right) |
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Term
| Factors that shift the Demand Curve for Domestic Assets |
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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) |
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Term
| What happens when the domestic interest rate rises due to inflation? |
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Definition
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Term
| What is the Effect of a rise in the Money supply? |
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Definition
| Dollar depreciates a lot, then appreciates to equilibrium |
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Term
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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 |
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Term
| When is the exchange rate more volatile? |
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Definition
In the short-run
- Helps to explain why exchange rates exhibit so much volatility |
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