Price at which one currency exchange for another currency
Foreign exchange market
Worldwide market where all countries currencies are both and sold in exchange for each other
fall in exchange rate of one country for another
rise in exchange rate of one currency for another
How is exchange rates determined?
By demand and supply in foreign exchange markets
Law of Demand on Canadian Dollar
If exchange rate rises quantity demanded of Canadian dollars decreases.
The _____ of one currency is the _____ of another currency
DEMAND and SUPPLY
Law of supply for Canadian dollar
if exchange rate rises, quantity supplied of Canadian dollar increases
Interest rate differential
difference in interest rates between countries.
Inflation rate differential
difference in inflation rate between countries.
International transmission mechanisms
how impacts of exchange rates are transmuted to real GDP and inflation
Purchasing power parity (PPP)
exchanges rates adjust so that money has equal real purchasing power in any country
Rate of return parity
rates of return on investments are equal across countries, accounting for expected depreciation/appreciation of exchange rates
Floating exchange rate
Determined by demand and supply in foreign exchange market
Fixed exchange rate
Determined by government or central bank
The Market clearing exchange rate
occurs when the quantity demanded and quantity supplied of Canadian dollars is equal.
Is a higher Canadian dollar good or bad?
It is bad as a higher exchange rate for the canadian dollar has advantages or imports being less expensive and cross boarder shopping is better but the disadvantages are there would be fewer exports and lower the real GDP