What Determines Exchange Rates? (chap 19)

short term trends

(less than 90 days) involves seasonality of the expected cycles of a business

asset market approach to exchange rates

emphasizes the role of portfolio repositioning by international financial investors

quantity theorem equation

in a country the money supply is equated with the demand for money, which is directly proportional to the money value of gross domestic product

domestic interest rate, foreign interest rate, current spot exchange rate, & the expected overall return on foreign-currency bonds

uncovered interest parity links together four variables:

bandwagon

A fallacy which assumes that because something is popular, it is therefore good, correct, or desirable.

-a raise in our money supply relative to the foreign money supply -a rise in foreign real domestic product relative to our real domestic product

A major conclusion of the monetary approach is that the spot exchange rate, e, the price of foreign currency in units of our currency, is raised in the long run by what following changes?

foreign; appreciate

Consider a simple two country (Home and Foreign) model. If Foreign decreases its money supply by 10% while all else remains constant, relative PPP predicts that over time the _____ currency will _____ by 10%.

-the basic return on the bond itself -the expected gain or loss on currency exchanges

Investors determine the expected overall return on an uncovered investment in a bond denominated in a foreign currency by using, what?

fallen

Let the exchange rate, e, denote the spot price of foreign currency in terms of domestic currency. If the domestic currency appreciates while both the domestic interest rate and the expected future spot exchange rate are constant, it can be deduced that the foreign interest rate has

c. depreciated

Medium-term trends in some exchange rates have sometimes been counter to the currencies' long-term trends. This would mean, for example, that if a currency's long-term trend is upward, it nevertheless had a period (or periods) of a few years when it a. appreciated b. devalued c. depreciated

temporarily

Overshooting refers to the phenomenon whereby an unexpected event pushes an exchange rate _____ past its long-run equilibrium value.

relative purchasing power parity

the difference between changes over time in product-price levels in two countries will be offset by the change in the exchange rate over this time

nominal bilateral exchange rate

the regular market rate between two currencies

differential

The analytical framework employed by the asset market approach to exchange rates focuses on pressures exerted upon the spot exchange rate brought about by an uncovered interest

portfolio repositioning

The asset market approach to exchange rates emphasizes the role of ___________________ by international financial investors.

product prices and exchange rate

The concept of purchasing power parity, (PPP), contains our core understanding of the relationship between _____________________________ in the long run.

nominal effective exchange rate

the weighted-average spot-exchange-rate value of a country's currency

absolute purchasing power parity

a basket or bundle of tradable products will have the same cost in different countries if the cost is stated in the same currency

law of one price

a product that is easily and freely traded in a perfectly competitive global market should have the same price everywhere, once the prices at different places are expressed in the same currency

overshooting

an instance of an exchange rate's short-term response to a change in market fundamentals is greater than its long-term response

domestic

If the expected future spot exchange rate decreases w/ interest rate unchanged, return differential changes in favor of ________ currency investments.

foreign

If the expected future spot exchange rate increases w/ interest rate unchanged, return differential changes in favor of ________ currency investments.

directly

In the quantity theory equation, the demand for money is assumed to be _____ proportional to the money (or nominal) value of GDP.

real bilateral exchange rate

Incorporates both the market exchange rate and the product price levels for two countries.

purchasing power parity

A monetary measurement of development that takes into account what money buys in different countries.

real effective exchange rate

A weighted average of the exchange rate of a country's currency relative to those of all trading partners

demands & supplies of assets denominated in different currencies

Economists believe that pressures on exchange rates in the short run can be best understood in terms of the

medium

Exchange rate movements over periods of several years are referred to as ______ term trends.

False; does not

For many products, the law of one price does hold closely. True or False?

depreciate

Relative PPP predicts that, when inflation differential is negative, (US has a higher inflation rate, or the country has a lower one), the country's currency should __________.

appreciate

Relative PPP predicts that, when inflation differential is positive, (US has a higher inflation rate, or the country has a lower one), the country's currency should __________.

True

The law of one price works well for heavily traded commodities (ie: gold, other metals, crude oil etc). True or False?

asset market

The view that exchange rates are part of the equilibrium for the markets for financial assets denominated in foreign currencies is known as the _____ approach to exchange rates.

long term trends

Trends that affect prices over a long period of time, usually caused by economic conditions