Question

In: Economics

“Short-run pressures on market exchange rates result mainly from gradual changes in flows of international trade...

“Short-run pressures on market exchange rates result mainly from gradual changes in flows of international trade in goods and services or expectations?” Why?

Solutions

Expert Solution

When exports increase (and/or imports decrease), there is higher demand for domestic currency (and/or lower demand for foreign currency), which appreciates domestic currency (and depreciates foreign currency). So, exchange rate increases. Similarly, when exports decrease (and/or imports increase), there is lower demand for domestic currency (and/or higher demand for foreign currency), which depreciates domestic currency (and appreciates foreign currency). So, exchange rate decreases.

When people expect a currency to appreciate, they increase their demand for that currency and decrease the demand for other currencies, so the currency in higher demand appreciates (and the other currencies depreciate). Similarly, when people expect a currency to depreciate, they decrease their demand for that currency and increase the demand for other currencies, so the currency in lower demand depreciates (and the other currencies appreciate).


Related Solutions

Briefly discuss what causes short run and long run changes in exchange rates. Be sure to...
Briefly discuss what causes short run and long run changes in exchange rates. Be sure to include key terms such as asset market approach to exchange rates, purchasing power parity, and the monetary approach to exchange rates.
In the short run, the entry of firms will result from ___________________. In the short run,...
In the short run, the entry of firms will result from ___________________. In the short run, the exit of firms will result from ______________. In the long run, there will be _______ economic profit. Triple Equality is when _____ = minimum ______ = ______ The term productive efficiency means ______ = _______. This is important because _________________________. The term allocative efficiency means _____ = ________. This is important because __________________________.
Write an explanation of the determination of long-run exchange rates versus the determination of short-run exchange...
Write an explanation of the determination of long-run exchange rates versus the determination of short-run exchange rates.
Explain what determines exchange rates in the short and long run.
Explain what determines exchange rates in the short and long run.
In a monetary model with fixed exchange rates, discuss short run and long run effect of...
In a monetary model with fixed exchange rates, discuss short run and long run effect of a devaluation on balance of payments. In a Mundell-Fleming model with floating exchange rates and perfect capital mobility, discuss effectiveness of monetary and fiscal policy.
Summarize International Accounting Standard 21, the effects of changes in foreign exchange rates; and International Accounting...
Summarize International Accounting Standard 21, the effects of changes in foreign exchange rates; and International Accounting Standard 39, Financial Instruments, recognition and measurement.
Explain how exchange rates are considered a self-correcting mechanism of international trade.
Explain how exchange rates are considered a self-correcting mechanism of international trade.
Consider the short-run effect of a decrease in US money demand on interest rates and exchange...
Consider the short-run effect of a decrease in US money demand on interest rates and exchange rates
Answer the following questions for Small Open Economy in the short run with floating exchange rates...
Answer the following questions for Small Open Economy in the short run with floating exchange rates (SOE in the SR) a) In the Mundell–Fleming model (SOE in the SR) with floating exchange rates, explain what happens to aggregate income, the exchange rate, and the trade balance when taxes are decreased. (8 points) b) In the Mundell–Fleming model (SOE in the SR) with floating exchange rates, explain what happens to aggregate income, the exchange rate, and the trade balance when the...
3. Explain the relationship between real exchange rates and output in a model of short run...
3. Explain the relationship between real exchange rates and output in a model of short run response to policy shocks. Why czn’t we answer this question about the long run relationship for an economy near full employment? You should graph relative demand and supply to make this happen.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT