Economics Study Set 20

Business

Quiz 19 :
International Finance and the Foreign Exchange Market

bookmark
Unbookmark

Quiz 19 :
International Finance and the Foreign Exchange Market

The exchange rate is the price of foreign currency in terms of home currency. The international trade between two countries allows exchange of goods and services. This exchange between two countries involves the exchange of paper money or currency. To conduct the trade one trading partner need the currency of other. The exchange rate determines how much home currency will need to purchase a basket of good that is priced as one unit of foreign currency. The currencies are bought and sold in the foreign exchange market. The equilibrium price of foreign currency is determined through the demand and supply of home currency in the exchange market. If the price of the foreign currency relative to home currency rises, that is now it needed more of the home currency to purchase one unit of foreign currency, the home currency depreciates. On the other hand, if the price of the foreign currency relative to home currency falls, that is now it needed less of the home currency to purchase one unit of foreign currency, the home currency appreciates. An appreciation of home currency will mean that the less money will now be needed to purchase foreign goods and services. This means that the imports become cheaper. A depreciation of home currency will mean that the more money will now be needed to purchase the same foreign goods and services. This means that the imports become expensive. If dollar depreciates relative to Japanese Yen, the price of dollar terms of yen will decrease. This means more of the US dollar now needed to purchase one Japanese camera than before. That is price of Japanese camera in terms of dollar will increase. This means the dollar price of Japanese camera will increase if the currency depreciates. The law of demand states that, if the price of a normal good rises, the quantity demanded of that good will fall. The rise in price of the Japanese camera will decrease the purchase. The quantity of Nikon camera purchased by American will fall.

The exchange rate is the price of foreign currency in terms of home currency. The international trade between two countries allows exchange of goods and services. This exchange between two countries involves the exchange of paper money or currency. To conduct the trade one trading partner need the currency of other. The exchange rate determines how much home currency will need to purchase a basket of good that is priced as one unit of foreign currency. The currencies are bought and sold in the foreign exchange market. The equilibrium price of foreign currency is determined through the demand and supply of home currency in the exchange market. If the price of the foreign currency relative to home currency rises, that is now it needed more of the home currency to purchase one unit of foreign currency, the home currency depreciates. On the other hand, if the price of the foreign currency relative to home currency falls, that is now it needed less of the home currency to purchase one unit of foreign currency, the home currency appreciates. An appreciation of home currency will mean that the less money will now be needed to purchase foreign goods and services. This means that the imports become cheaper. A depreciation of home currency will mean that the more money will now be needed to purchase the same foreign goods and services. This means that the imports become expensive. The demand for foreign exchange is derived from the purchase of foreign goods by the domestic consumer. The domestic consumer supply domestic currency in the exchange market to acquire foreign currency to purchase foreign goods, services and assets. Thus, any point on the demand curve reflects the total domestic purchase from the foreigner. On the other hand, the supply for foreign exchange is derived from the sales of foreign goods by the domestic consumer. The foreign consumer demand domestic currency in the exchange market to acquire foreign currency to purchase domestic goods and services and assets. Thus, any point on the supply curve reflects the total domestic sales to the foreigner. At equilibrium the demand for foreign exchange must equal to the supply of foreign exchange. This will happens all the because of flexible exchange rate. Any disequilibrium will cause a change in the exchange rate and the market will reach equilibrium. The equilibrium in the foreign exchange market also implies that total purchase of goods, services and asset from foreigner must balance with the total sales of goods and services and assets.

The exchange rate is the price of foreign currency in terms of home currency. The international trade between two countries allows exchange of goods and services. This exchange between two countries involves the exchange of paper money or currency. To conduct the trade one trading partner need the currency of other. The exchange rate determines how much home currency will need to purchase a basket of good that is priced as one unit of foreign currency. The currencies are bought and sold in the foreign exchange market. The equilibrium price of foreign currency is determined through the demand and supply of home currency in the exchange market. If the price of the foreign currency relative to home currency rises, that is now it needed more of the home currency to purchase one unit of foreign currency, the home currency depreciates. On the other hand, if the price of the foreign currency relative to home currency falls, that is now it needed less of the home currency to purchase one unit of foreign currency, the home currency appreciates. An appreciation of home currency will mean that the less money will now be needed to purchase foreign goods and services. This means that the imports become cheaper. A depreciation of home currency will mean that the more money will now be needed to purchase the same foreign goods and services. This means that the imports become expensive. The demand for foreign exchange is derived from the purchase of foreign goods by the domestic consumer. The domestic consumer supply domestic currency in the exchange market to acquire foreign currency to purchase foreign goods, services and assets. Thus, any point on the demand curve reflects the total domestic purchase from the foreigner. On the other hand, the supply for foreign exchange is derived from the sales of foreign goods by the domestic consumer. The foreign consumer demand domestic currency in the exchange market to acquire foreign currency to purchase domestic goods and services and assets. Thus, any point on the supply curve reflects the total domestic sales to the foreigner. At equilibrium the demand for foreign exchange must equal to the supply of foreign exchange. This will happens all the because of flexible exchange rate. Any disequilibrium will cause a change in the exchange rate and the market will reach equilibrium. The equilibrium in the foreign exchange market also implies that total purchase of goods, services and asset from foreigner must balance with the total sales of goods and services and assets. Although, the equilibrium in exchange market implies that total purchase of goods, services and asset from foreigner must balance with the total sales of goods and services and assets, it does not implies the same for export and import of goods and services. This is because, the import and export of goods and services does not include the change of ownership and foreign direct investment. These items also create supply and demand for exchanges along with imports and export. Therefore, although flexible exchange rate ensures balance purchase by domestic consumers to foreigners and sales to foreigner by domestic consumers, it does not imply a balance between export of goods and services with import of goods and services.

Related Quizzes