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Econ omics Unit 12. 3 B Foreign exchange markets System of Exchange Rate Системы валютных курсов Viktor Ni, NIS

Learning objective • Distinguish exchange rate systems floating, fixed and managed floating Lesson objective • Distinguish exchange rate systems floating, fixed and managed floating • Understand the factors which might shift the supply/demand for currency

Part 1 Types of exchange rate

Types of exchange-rate system • Flexible (floating) exchange rate. A rate of exchange determined by the international demand for and supply of a nation’s money; a rate free to rise or fall (to float). • Fixed exchange rate. A rate of exchange that is set in some way and therefore prevented from rising or falling with changes in currency supply and demand. • Гибкий (плавающий) обменный курс. Курс валюты, который определяется спросом и предложением иностранных денег и который может свободно повышаться и понижаться • Фиксированный обменный курс. Курс валюты, свободное повышение или снижение которого не допускается Mc. Connell, Campbell R. Economics: principles, problems, and policies / Campbell R. Mc. Connell, Stanley L. Brue, Sean M. Flynn. — 18 th ed. p. 869

Managed floating exchange rate • An exchange rate that is allowed to change (float) as a result of changes in currency supply and demand but at times is altered (managed) by governments via their buying and selling of particular currencies. – Currency intervention, also known as foreign exchange market intervention, or currency manipulation • Обменный курс, который может измениться (плавать) в результате изменения валютного спроса и предложения, но иногда меняется (управляется) правительством с помощью покупки и продажи конкретных валют. – Валютная интервенция

Евро Источники: http: //ru. investing. com/currencies/usdeur-chart https: //upload. wikimedia. org/wikipedi a/commons/b/be/Euro_banknotes. png

Китайский юань http: //ru. investing. com/currencies/us d-cny-chart http: //kursgrivny. narod. ru/uan 100. gif

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Part 2 Shift of the curve

Цена на нефть https: //news. yandex. ru/quotes/1006. html

Changes in Tastes 1(British pound) • Any change in consumer tastes or preferences for the products of a foreign country may alter the demand for that nation’s currency and change its exchange rate. If technological advances in U. S. wire-less phones make them more attractive to British consumers and businesses, then the British will supply more pounds in the exchange market in order to purchase more U. S. wireless phones. The supply-of-pounds curve will shift to the right, causing the pound to depreciate and the dollar to appreciate. • In contrast, the U. S. demand-for-pounds curve will shift to the right if British woolen apparel becomes more fashionable in the United States. So the pound will appreciate and the dollar will depreciate.

Relative Income Changes 2 (US Dollar) • A nation’s currency is likely to depreciate if its growth of national income is more rapid than that of other countries. Here’s why: A country’s imports vary directly with its income level. As total income rises in the United States, people there buy both more domestic goods and more foreign goods. • If the U. S. economy is expanding rapidly and the British economy is stagnant, U. S. imports of British goods, and therefore U. S. demands for pounds, will increase. The dollar price of pounds will rise, so the dollar will depreciate.

Relative Price-Level Changes • • 3 (EURO) Changes in the relative price levels of two nations may change the demand supply of currencies and alter the exchange rate between the two nations’ currencies. The purchasing-power-parity theory holds that exchange rates equate the purchasing power of various currencies. That is, the exchange rates among national currencies adjust to match the ratios of the nations’ price levels: If a certain market basket of goods costs $10, 000 in the United States and € 9000 in Germany, according to this theory the exchange rate will be $1 = € 0. 9. That way, a dollar spent in the United States will buy exactly as much output as it would if it were first converted to euro (at the $1 = € 0. 9 exchange rate) and used to buy output in Germany. • • In practice, however, exchange rates depart from purchasing power parity, even over long periods. Nevertheless, changes in relative price levels are a determinant of exchange rates. If, for example, the domestic price level rises rapidly in the United States and remains constant in Germany, U. S. consumers will seek out low-priced German goods, increasing the demand for euro. The Germany will purchase fewer U. S. goods, reducing the supply of euro. This combination of demand supply changes will cause the euro to appreciate and the dollar to depreciate.

Relative Interest Rates 4 (Tenge) • Changes in relative interest rates between two countries may alter their exchange rate. Suppose that real interest rates rise in the United States but stay constant in Great Britain. British citizens will then find the United States a more attractive place in which to loan money directly or loan money indirectly by buying bonds. • To make these loans, they will have to supply pounds in the foreign exchange market to obtain dollars. The increase in the supply of pounds results in depreciation of the pound appreciation of the dollar.

Changes in Relative Expected Returns on 5 (Yen) • Stocks, Real Estate, and Production Facilities International investing extends beyond buying foreign bonds. It includes international investments in stocks and real estate as well as foreign purchases of factories and production facilities. Other things equal, the extent of this foreign investment depends on relative expected returns. • To make the investments, investors in one country must sell their currencies to purchase the foreign currencies needed for the foreign investments. • For instance, suppose that investing in Japan suddenly becomes more popular due to a more positive outlook regarding expected returns on stocks, real estate, and production facilities there. U. S. investors therefore will sell U. S. assets to buy more assets in Japan. The U. S. assets will be sold for dollars, which will then be brought to the foreign exchange market and exchanged for yen, which will in turn be used to purchase Japanese assets. The increased demand for yen in the foreign exchange market will cause the yen to appreciate and therefore the dollar to depreciate relative to the

Speculation 6 (Swiss franc) • Currency speculators are people who buy and sell currencies with an eye toward reselling or repurchasing them at a profit. Suppose speculators expect the U. S. economy to (1) grow more rapidly than the Swiss economy and (2) experience a more rapid rise in its price level than will Swiss. These expectations translate into an anticipation that the Swiss franc will appreciate and the dollar will depreciate. Speculators who are holding dollars will therefore try to convert them into Swiss francs. This effort will increase the demand for Swiss francs and cause the dollar price of Swiss francs to rise (that is, cause the dollar to depreciate). • A self-fulfilling prophecy occurs: The Swiss franc appreciates and the dollar depreciates because speculators act on the belief that these changes will in fact take place. In this way, speculation cause changes in exchange rates. (We deal with currency speculation in more detail in this chapter’s Last Word. )

What will happen? • Japanese electronic equipment declines in popularity in the United States Ø Japanese yen depreciates; Ø U. S. dollar appreciates 1

What will happen? • European tourists reduce visits to the United States Ø U. S. dollar depreciates; Ø European euro appreciates 2

What will happen? • England encounters a recession, reducing its imports, while U. S. real output and real income surge, increasing U. S. imports Ø British pound appreciates; Ø U. S. dollar depreciates 3

What will happen? • Switzerland experiences a 3% inflation rate compared to Canada’s 10% rate Ø Swiss franc appreciates; Ø Canadian dollar depreciates 4

What will happen? • The Federal Reserve drives up interest rates in the United States, while the Bank of England takes no such action Ø U. S. dollar appreciates; Ø British pound depreciates 5

What will happen? • Corporate tax cuts in the United States raise expected after-tax investment returns in the United States relative to those in Europe Ø U. S. dollar appreciates; Ø the euro depreciates 6

What will happen? • Currency traders believe South Korea will have much greater inflation than Taiwan Ø South Korean won depreciates; Ø Taiwan dollar appreciates. 7

What will happen? • Currency traders think Norway’s interest rates will plummet relative to Denmark’s rates Ø Norway’s krone depreciates; Ø Denmark’s krone appreciates 8

Рефлексия На сколько я понял(а)… • Distinguish exchange rate systems floating, fixed and managed floating • Understand the factors which might shift the supply/demand for currency >80% (11 -14) >60% (8 -10) >40% (5 -7) <40% (0 -4)

Homework • Подумать какая из систем лучше для тенге … http: //and. kz/userfiles/item/x 46678 d 20151218112616. jpg