Economics and Statistics

Floating exchange rate:  the equilibrium exchange rate and quantity determined by the foreign exchange market. Anything that shifts the demand or supply curve will change the equilibrium exchange rate. Determinants of demand and supply for a currency: Change in taste and preferences: say Chinese consumers start to prefer American made cars. We should expect the demand for US dollars to go up (in the market for dollars in China) and the supply for the Chinese Yuan to go up as well (in the market for Yuan in the U.S). This will lead to an appreciation of the U.S dollars and a depreciation of the Chinese Yuan. Relative income level: consumers will be more likely to consume goods from countries with lower inflation rates. Relative interest rate: the higher the interest rate (relative to another country), the higher the demand for a country's currency, as investors are interested in this opportunity.  Speculation: expectation about a country's exchange rate among investors. Fo...

  You are given the following demand and supply schedules for the U.S foreign exchange market for Mexican pesos: Identify the equilibrium exchange rate and quantity, and draw the demand and supply curves. Then, what would happen to the value of the pesos if the demand for American goods increases? What should we expect to happen to the U.S current account? Assuming the trade balance is by far the biggest variable and the U.S 's current account was equal to 0 before this sudden increase. The equilibrium must be the point that is shared by both the demand and supply schedules. Thus, one pesos is worth about 0.5 U.S dollars (the exchange rate) and there are 6,250,000 pesos supplied at this point, assuming that one p is worth 10 million pesos. Let's graph the demand and supply curves: If the consumers in Mexico want to consume more American goods, then we should expect the supply curve for pesos to shift to the right. This will cause an appreciation of the dollar and depreciation o...

A currency exchange rate tells us about the value of a currency relative to another currency.  We say that a currency appreciates when its relative value goes up. We say that a currency depreciates when its relative value decreases. In a market that relates two currencies, if one appreciates, it must be the case that the other currency depreciates.  Demand in the foreign exchange market: it represents the quantity of a currency demanded by agents who are holding other currencies. The agents want to buy goods, services, or financial assets from a country whose currency is demanded. The demand must be downward slopping. The weaker the currency, the more attractive the goods produced in that country are, and foreign consumers need to hold more of that currency in order to buy the products. Thus, a change in the exchange rate leads to a movement along the demand curve. Supply in the foreign exchange market: it represents the willingness of people in the country supply to foreigner...

Current account deficit:  this will cause a currency depreciation, as the demand for imported goods is bigger than the foreign demand for exported goods.   This will make it easier for domestic producer to exports their goods as they, the goods, become relatively cheaper on the foreign market. A deficit in the balance of trade implies that the financial account must be positive (remember Xn= S-I). In order to pay for the imported goods, it must be the case that foreign entities own more domestic financial assets. Furthermore, foreign countries will buy domestic government debt. The central bank can try to offset inflation by raising the interest rate which can then attract foreign capital (i.e money). However, in the short term, this will be a monetary contractionary policy. Current account surplus: The domestic currency will appreciate, since foreign demand for exported goods is bigger than the domestic demand for imported goods. Note that domestic savings are then ...