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单击此处编辑母版标题样式,单击此处编辑母版文本样式,第二级,第三级,第四级,第五级,*,Exchange Rate Determination,4,Chapter,South-Western/Thomson Learning 2003,Chapter Objectives,To explain how exchange rate movements are measured;,To explain how the equilibrium exchange rate is determined;and,To examine the factors that affect the equilibrium exchange rate.,MeasuringExchange Rate Movements,An exchange rate measures the value of one currency in units of another currency.,When a currency declines in value,it is said to depreciate.When it increases in value,it is said to appreciate.,On the days when some currencies appreciate while others depreciate against the dollar,the dollar is said to be“mixed in trading.,MeasuringExchange Rate Movements,The percentage change(%,D),in the value of a foreign currency is computed as,S,t,S,t,-1,S,t,-1,where S,t,denotes the spot rate at time,t,.,A positive%,D,represents appreciation of the foreign currency,while a negative%,D,represents depreciation.,Approximate Spot Rate of,$,Approximate that could be Purchased with$10,000,Approximate Annual%,D,%,Fluctuation of the British PoundOver Time,For the latest exchange rates,visit:,:/bloomberg /,:/money n /,:/reuters /,Online Application,Value of,Quantity of,D:Demand for,$1.55,$1.50,$1.60,S:Supply of,equilibrium exchange rate,Exchange Rate Equilibrium,An exchange rate represents the price of a currency,which is determined by the demand for that currency relative to the supply for that currency.,$/,Quantity of,S,0,D,0,r,0,U.S.inflation,U.S.demand for British goods,and hence.,D,1,r,1,S,1,Factors that InfluenceExchange Rates,Relative Inflation Rates,British desire for U.S.goods,and hence the supply of.,$/,Quantity of,r,0,S,0,D,0,S,1,D,1,r,1,U.S.interest rates,U.S.demand for British bank deposits,and hence.,Factors that InfluenceExchange Rates,Relative Interest Rates,British desire for U.S.bank deposits,and hence the supply of.,Relative Interest Rates,Factors that InfluenceExchange Rates,It is thus useful to consider,real interest rates,which adjust the nominal interest rates for inflation.,A relatively high interest rate may actually reflect expectations of relatively high inflation,which discourages foreign investment.,Relative Interest Rates,Factors that InfluenceExchange Rates,This relationship is sometimes called the,Fisher effect,.,real nominal,interest,interest inflation rate,rate rate,$/,Quantity of,S,0,D,0,r,0,U.S.income level,U.S.demand for British goods,and hence.,D,1,r,1,Factors that InfluenceExchange Rates,Relative Income Levels,No expected change for,the supply of.,S,1,Government Controls,Governments may influence the equilibrium exchange rate by:,imposing foreign exchange barriers,imposing foreign trade barriers,intervening in the foreign exchange market,and,affecting macro variables such as inflation,interest rates,and income levels.,Factors that InfluenceExchange Rates,Expectations,Foreign exchange markets react to any news that may have a future effect.,Institutional investors often take currency positions based on anticipated interest rate movements in various countries.,Because of speculative transactions,foreign exchange rates can be very volatile.,Factors that InfluenceExchange Rates,Expectations,Factors that InfluenceExchange Rates,Fed chairman suggests Fed Is unlikely to cut U.S.interest rate Strengthened,A possible decline in German interest rates,Strengthened,Central banks expected to intervene to boost the euro Weakened,Signal Impact on$,Poor U.S.economic indicators Weakened,Interaction of Factors,Trade-related factors and financial factors sometimes interact.Exchange rate movements may be simultaneously affected by these factors.,For example,an increase in the level of income sometimes causes expectations of higher interest rates.,Factors that InfluenceExchange Rates,Interaction of Factors,Factors that InfluenceExchange Rates,The sensitivity of the exchange rate to these factors is dependent on the volume of international transactions between the two countries.,Over a particular period,different factors may place opposing pressures on the value of a foreign currency.,Trade-Related,Factors,1.Inflation,Differential,2.Income,Differential,3.Govt Trade,Restrictions,Financial,Factors,1.Interest Rate,Differential,2.Capital Flow,Restrictions,How Factors Can Affect Exchange Rates,U.S.demand for foreign goods,i.e.demand for foreign currency,Foreign demand for U.S.goods,i.e.supply of foreign currency,U.S.demand for foreign securities,i.e.demand for foreign currency,Foreign demand for U.S.securities,i.e.supply of foreign currency,Exchange rate between foreign currency and the dollar,How Factors Have Influenced Exchange Rates,Because the dollars value changes by different magnitudes relative to each foreign currency,analysts often measure the dollars strength with an index.,The weight assigned to each currency is determined by its relative importance in international trade and/or finance.,Factors that InfluenceExchange Rates,With Respect to the Dollar,Value of Fo
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