International Economics Course 2

International Economics
Course 2 4-9-2018 Jurne Sleddens



Floating exchaange raten
The exchange rate fuctuates as a result of supply and demand.
You have dirty (modest control) and clean (uncontrolled) foaang exchange rates.

Exercise
How can Canadian bank reduce the value of the CAD relatve to the USD?
 Buy USD with CAD
Why would they be interested in this?
 You can export more because you’re cheaper

Suppose that US has a huge trade defcit import more than you export) with Mexico. How will this
affect the DollarP翛eso exchange rate?
 翛eso becomes more expensive vis-a-vis the USD this is called the pure effect)
The ‘pure effect’ would be that the USD becomes stronger vis-a-vis the 翛eso.
Why is the pure effect not always achieved?
 Because importPexport is one factor that affects the demand for the currencies.

Name one pro and one con of fxed exchange rates?
 Less transacton risk when you do internatonal business = +
 It gives you less fexibility as a country = -
Name one pro and one con of foatng exchange rates?
 It gives you fexibility as a country = +
 More transacton risk when you do internatonal business = -

Are these statements false or truth?
•Statement: Most advanced economies have foatng exchange rates.
 True
•Statement: If USD weakens relatve to the Japanese Yen, it becomes easier for US based companies
to export to Japan.
 True
•Statement: The AED is pegged to the USD. When the USD is dropping in value, the Emirats must use
their currency to buy USD if they wish to retain the fxed exchange rate.
 True