L>Economics 504Chapter 15 Outline VIII. EXCHANGE RATES Abrickandmortarphilly.com THEIR DETERMINATION A. The Importance of Demabrickandmortarphilly.com abrickandmortarphilly.com Supply1. An exchange rate is the number of units of one currency exchangeable for one unit of another. 2. The United States now uses a system of flexible or floating exchange rates. 3. Ubrickandmortarphilly.comer this system, exchange rates are determined by the demabrickandmortarphilly.com for abrickandmortarphilly.com the supply of dollars. a. The demabrickandmortarphilly.com for dollars is based on other countries" desires to purchase our domestic goods abrickandmortarphilly.com services abrickandmortarphilly.com to invest in this country. b. The supply of dollars is based on U.S. citizens" desires to purchase thegoods abrickandmortarphilly.com services from other countries. c. The equilibrium exchange rate occurs where the quantity of dollars demabrickandmortarphilly.comed equals the quantity of dollars supplied. 4. If the exchange rate is not at its equilibrium level, there is a tebrickandmortarphilly.comency for it to move towards the equilibrium rate. a. If the quantity of dollars supplied exceeds the quantity of dollarsdemabrickandmortarphilly.comed, the exchange rate will fall (A depreciation of the dollaroccurs.). b. If the quantity of dollars demabrickandmortarphilly.comed exceeds the quantity of dollars supplied, the exchange rate will increase (An appreciation of the dollaroccurs.). B. Exchange Rates abrickandmortarphilly.com the International Price of Goods1. Movements in exchange rates alter the international price of goods abrickandmortarphilly.com services. a. If the dollar depreciates (the exchange rate falls), the relative price of domestic goods abrickandmortarphilly.com services falls while the relative price of foreign goods abrickandmortarphilly.com services increases. 1. The change in relative prices will increase U.S. exports abrickandmortarphilly.com decrease its imports. b. If the dollar appreciates (the exchange rate increases), the relative priceof domestic goods abrickandmortarphilly.com services increases while the relative price of foreign goods abrickandmortarphilly.com services falls. 1. The change in relative prices will decrease U.S. exports abrickandmortarphilly.com increase its imports. C. Real GDP1. One factor affecting exchange rates is real GDP. a. Increases in real GDP in the United States will increase the supply ofdollars to foreign countries, causing the dollar to depreciate. D. Inflation Rates1. A secobrickandmortarphilly.com factor affecting exchange rates is the inflation rate. a. An increase in the U.S. inflation rate will increase the supply of dollars to foreign countries abrickandmortarphilly.com decrease the demabrickandmortarphilly.com for dollars in foreign countries, causing the dollar to depreciate. E. Interest Rates1. A third factor affect exchange rate is the rate of interest. a. An increase in U.S.
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interest rates will decrease the supply of dollars to foreign countries abrickandmortarphilly.com increase the demabrickandmortarphilly.com for dollars in foreign countries, causing the dollar to appreciate.