Foreign Exchange

Basic concepts Foreign Exchange

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What is Foreign Exchange?

Foreign Exchange is the currency of other countries.

Foreign exchange includes deposits, credits and balance in any foreign currency.

Also refers to the global market where currencies are traded virtually around the clock.

Macro 5.2- Foreign Exchange (FOREX)

Current and capital account

  • current account is an important indicator about an economy's health. It is defined as the sum of the balance of trade, net income from abroad and net current transfers.
  • capital account is the net result of public and private international investments flowing in and out of a country.

Appreciating and Depreciating.

  • when the fed increases money supply the interest rate on American financial assets fall. And id the interest rate is lower in the U.S then demand for dollars fall and the dollar depreciates then net exports increase making aggregated demand shift to the right.
  • but when the fed decreases money supply the interest rates increase and the demand for money decreases appreciating the U.S dollar and the net exports decrease making aggregated demand shift to the left .

Who are the market participants in the foreign exchange market?

Answers may vary...

Can be categorized into five groups: international banks, bank customers, non-bank dealers, brokers, and central banks.

How do you calculate the foreign exchange rate?

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On an open economy, what is the effect on imports?

In an open economy, part of the income is spent on imports, causing domestic income to decline.

Spending on imports also depends on the relative prices of domestically produced and foreign-produced goods.

Because U.S. imports are somebody else’s exports, the extra import demand from the United States raises the exports of the rest of the world.

With no change in the exchange rate, what is the effect of the rising prices of one country?

When the export prices of one country rise, with no change in the exchange rate, the import prices of another rise.

If the inflation rate abroad is high, U.S. import prices are likely to rise.

Macro Unit 5 Intro- FOREX and International Trade

Factors affecting the exchange rate

The theory that exchange rates are set so that the price of similar goods in different countries is the same is known as the purchasing-power parity.

Exports, imports, and The Balance of Trade

Initially, the negative effect on the price of imports may dominate the positive effects of an increase in exports and a decrease in imports.

But when imports and exports have had a time to respond to price changes, the balance of trade improves.


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