Professional Documents
Culture Documents
Depreciation
Appreciation
4
D
USD0.97
USD0.96
USD0.95
Qty
At higher exchange rates, Americans
demand less AUD and vice versa.
USD0.97
USD0.96
USD0.95
Qty
At higher exchange rates, Australians
supply more AUD and vice versa.
Equilibrium
D
S
USD0.96
Qty
(C) Equilibrium Exchange Rate
This occurs where the quantity supplied equals
the quantity demanded of a foreign currency at a
10
specific local price.
11
D
D
USD0.96
USD0.95
Q1
Q2
Qty
12
Spot
Exchange
Rate
Asset Approach
1. Relative real interest rates
2. Prospects for economic growth
3. Supply & demand for assets
4. Outlook for political stability
5. Speculation & liquidity
6. Political risks & controls
Balance of Payments
1. Current account balances
2. Portfolio investment
3. Foreign direct investment
4. Exchange rate regimes
5. Official monetary reserves 15
16
M/P = y/v
where M is the national money supply, P is
the general price level, y is real GNP, and v
is the velocity of money.
18
ih = h - gyh + gvh
where ih is the domestic inflation rate, h is
the rate of domestic money supply expansion,
gyh is growth in real domestic GNP, and gvh
the change in the velocity of the domestic
money supply.
19
ih = h - gyh + gvh
= 5% - 2% + (-0.5%) = 2.5%
Foreign inflation rate can be obtained in the
same way. Combining these two equations
along with PPP leads to the following predicted
exchange rate change:
20
e1 e0
e0
ih i f (h f ) ( g yh g yf ) ( gvh gvf )
24
27