Summary Complete notes for FLOATING EXCHANGE RATES - IBDP ECONOMICS HL

foreign exchange
↳
International transactions involve the use
of different currencies
,
known as
foreign exchange

A The demand for foreign currencies
generates a
supply of domestic currency & demand
for domestic
currency

generates a
supply of foreign currencies




demand supply of domestic currencies
for foreign currencies >
-




demand
for domestic
currency
-
>
Supply of foreign currencies




Rate
Exchange :
the value of one currency expressed in terms of another
·




Exchangerateyatyn e
flexible exchange
rate system
by Market
forces (demand /supply) with no
govt /central bank intervention EU residents who
↑
-




,


sell Euros to


N Sof $ A sof E
buy $ to
import,
Excess
Supply Excess & Supply invest , travel

- -
0 .

80 me 2 -
00
-


# ↓
Market
for Market
for Euros (E)
-
67
&
0 . 1 56.




Us Dollars
0 .
5 0 125
~ u
Excess US residents who
Excess
demand
Demand E Demand I Euros
D for $
Dog E

7 >

Ea Sty of $ Oty of E


Demand for $ will come
from Eurozone residents who · According to Market Equilibrium
need Us Dollars
for transactions with the US/VS firms 1$ = 0 67 E .




↳ Investors It 1 $
Importers Tourists etc = .

50
, , ,




DownwardSloping D Po$ In
as the terms of t increases , i
floating exchange rate
=
In . a


Eurozone residents demandfewer Us dollars system ,
the Eer Is determined
by
Upward slopings as the Po$ in terms of increases
, demand /supply where the
Sty of
-
=
a



Eurozone US dollars
goods
become
cheaper ,
more are
Currency demanded =
Sty of a
currency
supplied exports Supplied bank
as increase
, wo any govt/central
-



interventiou

, Once exchange rate settles at 15 Equilibrium it demand
an ,
can be changed by shifts in the

or
supply of the
Currency :




*
Appreciation : An increase in the value of a
currency in the
floating exchange
rate
system
*
Depreciation : A decrease in the value
of a
currency in the
floating exchange rate
system


Rightward Stft in Demand Curve for $
=

Appreciates (As$Supply remains the same)

Leftward Shift Supply Curve
for $
Appreciates /As $ Demand the same
=
in remains




Lytward Shift In Demand Curve
for $ $Depreciation
=

(As $ Supply remains the same)

Rightward Shift in
Supply Curve
for $ =


$Depreciation (As $Demand remains the same


Causes of Changes In Exchange Rates


I
Changes In Currency Demand-factors that lead to in flow of funds into a
country

A Exports & Factors
Affecting Exports
↑ Demand
·

Foreign Demand
for Exports :
for Exports ,
Demand
for domestic currency (right shyt) ,
Domestic

Currency Appreciates & vice versa



Demand Services like ↑ Tourists
Foreign for Tourism demand (right)
·


for domestic currency D C
Appreciates
: .




,
,




·
Rate of Inflation Relative to other countries : x rate of Inflation exports ,
become
cheaper for foreigners .
↑
Exports,
to other countries
compared Domestic Currency Appreciates & vice versa


Relative Growth Rates :
·


Growth of Foreign Country ,
incomes in Foreign Country ,
↑ Demand
for Exports from Country B
,

↑ Demand for Country B's domestic currency ,
B's currency Appreciates & vice versa




B
. Investment &
factors affecting Investment
·
Inward Investments
by Foreigners In both :
If the investment is inward (coming into the
country),
(FDIs] Foreign Direct Investments Pattalio Investment then ↑ Demand
for Currency
Domestic &
if
Investments by Multinational Financial Investments like investments ↓ demand for ,
domestic
currency
corporations in
productive facilities purchase of stocks bonds,




·
Relative Interest Rates Interest Rates 4 In How of Finanual Investments ↑ Demand
for Domestic Carency
foreign
:

, ,




compared to other countries Such as
Savings Deposits): D C
Appreciates & vice versa
.
.




bonds which depend on the Rol