Slide 1

Slide 2 [S&D determine currency strengths] Japan United States [What if the U.S. wants more Mazdas from Japan?] Slide 3 [S&D determine currency strengths] Europe United States [What if the Europeans want more American cars?] Slide 4 Japanese TV cost 207,000 A. $1 = 159 [TV would cost $1,478] 1. A. $1 = 159 [TV would cost $1,478] B. $1 = 80 [TV would cost $2,588] B. $1 = 80 [TV would cost $2,588] C. $1 = 84 [TV would cost $2,464] C. $1 = 84 [TV would cost $2,464] 2. A. 1 Euro = $1.17 B. 1 Euro = 86 [in 2002] B. 1 Euro = 86 [in 2002] C. 1 Euro = $1.36 [in 2011] C. 1 Euro = $1.36 [in 2011] 3. $1=1.01 Loonies 4. A. $1 = 2,400 rupiahs [in 1996] B. $1 = 9,020 rupiahs [in 2011] B. $1 = 9,020 rupiahs [in 2011] 5. A. $1 = 3.5 pesos [in 1995] B. $1 = 12.05 pesos [ in 2011] B. $1 = 12.05 pesos [ in 2011] 6. A. 1970 $1 = W335 B. 2010 $1 = W1,116 [in 2011] B. 2010 $1 = W1,116 [in 2011] Appreciation/Depreciation History And $1 = 19.5 Vietnamese dongs Indonesian Rupiah Mexican Peso Korean Won [As high as $1.60 in 2010] The Euros pain is the Dollars gain. Slide 5 [Percent change from 8/11/97 to 8/11/98] C anadas D ollar [Loonie] -8.5 % Indonesias Rupiah -80.6 % Thailands Baht -26.3 % South Korean Won -33.3 % Mexicos Peso -15.2 % Japanese Yen -21.2 % So currency prices can be very volatile. Slide 6 [Now it is $1,171 Dinars = $1 ] Slide 7 The New Iraqi Dinar No Saddam Slide 8 SoDid President Bush Hurt Saddam Physically ? Slide 9 On January 1, 2002, 300 million Europeans in 12 countries woke up to a new currency, the euro. Windowsgateways 1. Windows and gateways dominate the front side of each opennesscooperation note as symbols of EU spirit of openness and cooperation. bridge On the back side is a bridge from a particular age, a communicationpeople of Europe metaphor for communication among the people of Europe Europe and the rest of the world and between Europe and the rest of the world. SignGreek letter epsilon 2. Sign was inspired by the Greek letter epsilon, cradle of European civilization in reference to the cradle of European civilization first letter Europe and the first letter of the word Europe. The parallel linesstability of the euro parallel lines represent the stability of the euro. Eight denominations of euro coins 3. Eight denominations of euro coins, each having a common side and a national side. Seven Euro Bank Notes Slide 10 1 cent 2 cents 5 cents 1 cent 2 cents 5 cents 10 cents 20 cents 50 cents 1 Euro 2 Euro coin 1 Euro 2 Euro coin Slide 11 Slide 12 $1 will buy EXCHANGE RATES:.63 British pounds 12.91 Mexican pesos.75 European euros 92.71 Japanese yen.0009 South Korean won 53.59 Indian rupee 1.00 Canadian dollars 1.36 Swiss francs 6.44 Swedish krona Foreign Currency per U.S. Dollar (2/5/13) 6. 23 Chinese Yuan Slide 13 Euro Price of $ 150 100 50 Quantity of Dollars Quantity of Dollars D s [Dollars looking for Euros] Reason for: Downward Sloping D Curve [As Euro price decreases, QD for $s increase] QD $ [Euros looking for dollars Slide 14 Euro Price of $ 150 100 50 Quantity of Dollars Quantity of Dollars D [Euros looking for $s] s [Dollars looking for euros Reason for: Upward Sloping S Curve [As Euro price increases, QS of dollars increase] QS $ Slide 15 D 50 50 D2D2D2D2 D3D3D3D3 A A D Euro Price of $ 150 150 100 100 # of Dollars D1D1D1D1 [Euros looking for $s] s $1.50 Dollar Price of Euro $1.00 $.50 # of Euros D1 S DA [Dollars looking for Euros] [Euros looking for Dollars] [Dollars looking for Euros] E2E2E2E2 E3E3E3E3APPRECIATIONOrDEPRECIATION Europeans decide to buy fewer American cars. fewer American cars. E1E1E1E1 Europeans decide to buy more American cars. more American cars. M will increase X will increase Slide 16 Increase in U.S. Growth Rate (Y) [We buy more from Japan appreciating the yen and depreciating the dollar] # of D1D1D1D1 S $ 1.00 $ 1.00 D2D2D2D2 D Price of Price of We want more Japanese cars, computers, DVD players, digital cameras, and camcorders. AS AD 2 AD 1 YRYRYRYR Booming Economy Y* Y* Y* Y* $1.50 A initiates supply The country who initiates the action (buying foreign goods, investing based on higher interest rates in foreign country, etc.) is the country whose supply of currency moves. Slide 17 Decrease in U.S. Growth Rate (Y) [We buy less from Japan depreciating the yen and appreciating the dollar] Quantity of Quantity of D1D1D1D1 S $ 1.00 D2D2D2D2 A Price of Price of Seven million of us have lost our jobs. We cant buy as many American or Japanese products. AS AD 1 AD 2 Y * Y * Recessionary Economy PL YRYRYRYR D 50 Slide 18 Cheaper goodslower prices 1. Cheaper goods (lower prices) High interest rates 2. High interest rates Popular items (Taste) 3. Popular items (Taste) This is because money is good for: Stuff now so cheaper prices are more beneficial. a. Stuff now so cheaper prices are more beneficial. b. Popular items are also stuff wanted now as they are b. Popular items are also stuff wanted now as they are also perceived to be more beneficial. also perceived to be more beneficial. Stuff later (in which case you need more money, c. Stuff later (in which case you need more money), and the way you get more money is to loan it, hence and the way you get more money is to loan it, hence benefiting from a higher interest rate. benefiting from a higher interest rate. country who initiates the action: Again, remember, the country who initiates the action: a. buying more foreign goods [because of taste, lower PL, or more income], b. invests more based on higher interest rates overseas, etc. c. is the country whose supply of currency moves c. is the country whose supply of currency moves. country being acted upon (The country being acted upon, is the country demand for their currency moves whose demand for their currency moves.) Im supplying blows. I demand that you stop. Slide 19 Therefore, it takes fewer pennies, so the dollar is stronger [$ price decreases] Therefore, it takes more pennies, so the dollar is weaker. [$ price increases] Slide 20 must shift in the same direction Remember this: Both the demand and the supply curves for the different currencies must shift in the same direction" Slide 21 increase in taste 1. Show how an increase in taste for Japanese cars would affect the market for the Yen and the Dollar. # of Yen # of Dollars 2. How would an increase in Mexicos real interest rate real interest rate affect the value of the Peso and the value of the Euro? high inflation 3. How would high inflation in South Korea affect the market for the Won and the Dollar? economic 4. How would a U.S. economic expansion expansion affect the value of the Dollar and the value of the Yen? e1 # of Pesos # of Euros # of Won # of Dollars # of Yen D D D D D D D D SS S S S S S S Appreciate Depreciate Appreciate Depreciate Depreciate Appreciate Depreciate Appreciate D2D2 S2S2 D2D2 S2S2 S2S2 S2S2 D2D2 e2 D2D2 $ Price of Yen Yen Price of $ Euro Price of Peso Peso Price of Euro $ Price of Won Won Price of $ Yen Price of $ $ Price of Yen $1 $1.50 50 100 P16 P12 100 150 $1 W1,030 W1,070 $.50 $1.00 100 50 $1.50 Slide 22 More Fun with the Foreign Exchange Market What shifts the demand and supply curves in the FOREX Slide 23 Market for YenMarket for Dollars price of $ $ price of D$1D$1 S$1S$1 D1D1 S1S1 100 $1.00 Q $1 Q 1 D$ 2 S2S2S2S2 150 $.50 $.50 Q2Q2Q2Q2 Quantity of Dollars Quantity of Yen D A D A Japan Q $2 Now we have more Yen! The Fed Slide 24 Market for Yen Market for Dollars D$1D$1 S$1S$1 D1D1 S1S1 100 $1.00 Q$1Q$1 Q 1 D$2D$2D$2D$2 S2S2S2S2 150 Q$2Q$2Q$2Q$2 $.50 $.50 Q2Q2Q2Q2 Quantity of Dollars Quantity of Yen Interest Rates in the U.S. NCREASE 6. Interest Rates in the U.S. INCREASE relative to Japans I.R. This impacts demand for interest rate sensitive financial investments in the two countries like bonds and CDs. Interest Rates in the U.S. NCREASE 6. Interest Rates in the U.S. INCREASE relative to Japans I.R. This impacts demand for interest rate sensitive financial investments in the two countries like bonds and CDs. price of $ $ price of D A D A Japan Again we have more Yen! The Fed Slide 25 A Quantity of Yen Market for Dollars D$1D$1 S$1S$1 100 Q $1 S$2S$2S$2S$2 50 50 Q$2Q$2Q$2Q$2 Market for Yen D1D1 S1S1 $1.00 Q1Q1 D2D2D2D2 $1.50 Q2Q2Q2Q2 Quantity of Dollars change in consumer preferences Taste for Japanese cars, computers and airplanes 7. There is a change in consumer preferences [ Taste ] for Japanese cars, computers and airplanes by Americans. Japanese Goods become more desirable because of uniqueness or increased quality. change in consumer preferences Taste for Japanese cars, computers and airplanes 7. There is a change in consumer preferences [ Taste ] for Japanese cars, computers and airplanes by Americans. Japanese Goods become more desirable because of uniqueness or increased quality. price of $ $ price of D D A Japan Japanese banks have more dollars! Bank of Japan Slide 26 Q2Q2Q2Q2 Market for Dollars D$1D$1 S$1S$1 100 Q $1 S$2S$2S$2S$2 50 50 Q$2Q$2Q$2Q$2 Market for Yen D$1D$1 S 1 $1.00 Q1Q1 D $2 $1.50 Quantity of Dollars Quantity of Yen U.S. economy GDPHIGHER more 8. The U.S. economy is in a strong recovery after the GREAT RECESSION. GDP, or National Income, in the U.S. is now HIGHER and Americans on average have more disposable income. price of $ $ price of D A A D Japan Japanese banks have more dollars! Bank of Japan Slide 27 Market for Pesos Market for Dollars D$1D$1 S $1 DP1DP1 SP1SP1 P 100 $1.00 Q $1 Q P1 D$2D$2D$2D$2 SP2SP2SP2SP2 P 150 Q $2 $.50 $.50 Q P2 Quantity of Pesos P price of $$ price of P D A D Mexico The Fed We now have more Pesos Quantity of Dollars A Slide 28 Market for Yen Market for Dollars D$1D$1 S $1 D1D1 S1S1 100 $ 1.00 Q$1Q$1 Q1Q1 D$2D$2D$2D$2 S 2 150 Q$2Q$2Q$2Q$2 $.50 $.50 Q2Q2Q2Q2 Quantity of Dollars Quantity of Yen Japanese economy GDP HIGHER more 10. The Japanese economy is in recovery. GDP, or National Income, in Japan is now HIGHER and the Japanese on average have more disposable income. price of $ $ price of D A D Japan The Fed We now have more Yen A Slide 29 Q2Q2Q2Q2 Quantity of Yen Market for Dollars D$1D$1 S$1S$1 100 Q $1 S$2S$2S$2S$2 50 50 Q$2Q$2Q$2Q$2 Market for Yen D 1 S1S1 1.00 Q1Q1 D2D2D2D2 1.50 Quantity of Dollars Price Level in the U.S. is now HIGHER 11. Due to a serious recession in Japan, the Price Level in the U.S. is now HIGHER relative to the Price Level in Japan six months ago. price of $ $ price of A D D A Japan Bank of Japan Japanese banks have more dollars! Slide 30 Therefore, it takes fewer pennies, so the dollar is stronger [$ price decreases] Therefore, it takes more pennies, so the dollar is weaker. [$ price increases] Slide 31 50 $s looking for Y The Market for Dollars Quantity of Dollars Yen Price of Dollar 0 100 P QeQe S$S$S$S$ D1$D1$D1$D1$ Exchange Rate: $1 = 100 D A A D Appreciation of the Dollar Increase in taste for U.S. goods Increase in U.S. Interest Rates Decrease in U.S. Price Level Decrease in U.S. Growth Rate Depreciation of Dollar Decrease in Taste Decrease in I n. Rates Increase Price Level Increase Growth Rate D2D2D2D2 150 E1E1E1E1 E2E2E2E2 E3E3E3E3 Decrease in U.S. Currency Price Increase in Currency Price D3D3D3D3 Yendepreciates Yenappreciates Y looking for $s Slide 32 50 Quantity of Dollars 100 P rice $S$$S$ D1$D1$D1$D1$ [Exchange Rate: $1 = Y100 ] D A A D D2D2D2D2 150 E1E1E1E1 E2E2E2E2 E3E3E3E3 D3D3D3D3 Yendepreciates Yenappreciates looking for $s Appreciation/Depreciation M X X M T aste [products/assets] Interest Rates Price Level Growth Rate Currency Price Currency Price + - $s looking for S$S$S$S$ $D$$D$ # of Dollars 100 150 50 S$S$S$S$ S$S$S$S$ D A A D /$ $1.50 # of S1S1S1S1 $/ S2S2S2S2 D DD A Japan will supply more yen for dollars. E2E2E2E2 E2E2E2E2 E2E2E2E2 S2S2S2S2 $1.50 D Japan will supply less yen for d ollars. A U.S. will supply fewer $ s for . U.S. will supply more $ s for . E2E2E2E2 Slide 33 R25 Quantity of Dollars Rupee Price of Dollar R50 R50 P rice $S1$$S1$ D1$D1$D1$D1$ A D R100 E1E1E1E1 E2E2E2E2 S2$S2$S2$S2$ Rupeeappreciates R s looking for $ s $ s looking for R s increase in U.S. firms direct investment in India (c) Using a correctly labeled graph of the foreign exchange market for the U.S. dollar, show how an increase in U.S. firms direct investment in India will affect the value of the U.S. dollar relative to the Indian currency (the rupee). Answer to 2. (c): Answer to 2. (c): The increase in investment in India will increase demand for the rupee & appreciate that The increase in investment in India will increase demand for the rupee & appreciate that currency. This would result in an increase in supply of the U.S. dollar for more rupees, currency. This would result in an increase in supply of the U.S. dollar for more rupees, depreciating the dollar. depreciating the dollar. Slide 34 [2pt] 3. (c) [2pt] Using a correctly labeled graph of the foreign exchange market for the U.S. decrease in the U.S. financial investment in Argentina dollar, show how a decrease in the U.S. financial investment in Argentina affects each. (i) The supply of United States dollars (ii) The value of the United States dollar relative to the peso Quantity of Dollars Peso Price of Dollar P50 P50 Price $S1$$S1$ D1$D1$D1$D1$ D A P100 E1E1E1E1 E2E2E2E2 S 2$ Pesodepreciates P looking for $s $s looking for P Answer to 3. (c) (i): If the U.S. decrease financial investment in Argentina, the U.S. would decrease their supply of dollars to Argentina, resulting in a decrease in demand for the peso. (c) (ii) As shown on the graph, the dollar would appreciate. [2 pt] inflation rate is 3% in the U.S. and 5% in Argentina (d) [2 pt] Suppose that the inflation rate is 3% in the U.S. and 5% in Argentina. What will happen to the value of the peso relative to the United States dollar as a result of the difference in inflation rates? Explain. (d) T he cheaper prices in the U.S. will result in more demand for U.S. goods and therefore the dollar, appreciating the dollar and depreciating the peso. Slide 35 # of Yen D $ 1.50 $ 1.00.50.50 Equals Equals Equals Dollar price of another currency [yen] increases [$1 to $1.50] International value of dollar falls (dollar depreciates) Exports increase Imports decrease Dollar price of another Currency [yen] decreases [$1 to.50] International value of dollar rises (dollar appreciates) Imports increase Exports decrease AppreciationDepreciation Currency Appreciation and Depreciation D A S D2D2D2D2 D3D3D3D3 Slide 36 Balance of Trade in Goods [R is Recession ] Direct relationship between Y & M Direct relationship between Y & M # of Yen D1D1D1D1 S $ 1.50 $ 1.00.50.50 D2D2D2D2 D3D3D3D3 D A A D Slide 37 Exports[Decreased] Imports[Increased] Strong Dollar As Interest Rates Rose... [all the way to 13%] 81 82 83 84 85 Exports decreased. Agricultural exports dropped from $44 billion to $28 billion as foreign agricultural goods became cheaper. 81 82 83 84 85 Imports increased as they became cheaper. The dollar got stronger and stronger Slide 38 Appreciation / Depreciation NS [14-19] Appreciation / Depreciation NS [14-19] Depreciation of the euro 17. Depreciation of the euro will (increase/decrease) their imports European exports & (increase/decrease) their imports. Mexico decides to increase their investments 18. If Mexico decides to increase their investments in the U.S. in the U.S., the peso will (appreciate/depreciate) which Mexicos imports would (increase/decrease) [Mexicos imports] U.S. exports to Mexico. more Japanese 19. If the exchange rate changes so that more Japanese yen are required to buy a dollar yen are required to buy a dollar then the yen will (appreciate/depreciate) and Americans will purchase purchase (more/less) Japanese goods. dollar depreciates relative to the peso 14. If the dollar depreciates relative to the peso, the peso peso will (appreciate/depreciate) relative to the dollar. Appreciation of the dollar 15. Appreciation of the dollar will tend to (increase/decrease) American imports & (increase/decrease) A merican exports. yen price of the dollar has decreased from 16. The yen price of the dollar has decreased from 150=$1 to 100=$1dollar 150=$1 to 100=$1, which means the dollar (apprec/deprec), which (incr/decr) our imports from Japan. Slide 39 Americans increase their investments in Europe 20. If Americans increase their investments in Europe, then the supply of dollars in European banks will (incr/decr) & the dollar will (apprec/deprec). Europeans quadrupled their investments in the U.S. stock market 21. If Europeans quadrupled their investments in the U.S. stock market, the supply of Euros in U.S. banks would (incr/decr) & the dollar would (appr/depr). increase in the inter- 22. Under a system of freely floating exchange rates, an increase in the inter- national value of a nations currency national value of a nations currency will cause its (exports/imports) to increase. fewer dollars are required to buy a yen 23. If the exchange rate changes so that fewer dollars are required to buy a yen, the dollar will (appr/depr) & (fewer/more) U.S. goods will be exported to Japan. dollar price of yen increases 24. If the dollar price of yen increases, then the dollar (appreciates/depreciates) relative to the yen and our exports to Japan (increase/decrease). Mexicos price level is increasing faster than that of the U.S. 25. If Mexicos price level is increasing faster than that of the U.S., the peso will (appr/depr) and their exports to the U.S.[our imports] will (incr/decr). Germans growth rate[income] is increasing faster than that of Mexico 26. If Germans growth rate[income] is increasing faster than that of Mexico, the euro will (apprec/deprec) & Germanys exports to Mexico will (incr/decr). interest rates are decreasing faster in Italy relative to Mexico 27. If interest rates are decreasing faster in Italy relative to Mexico, the euro will (appreciate/depreciate) and Italys exports to Mexico will (incr/decr). dollar price of the yen decreases 28. If the dollar price of the yen decreases, the dollar (appreciates/depreciates) relative to the yen and American exports to Japan (increase/decrease). dollar price of the euro decreases 29. If the dollar price of the euro decreases, our imports from Europe (incr/decr). $1=200 to $1=100 30. If the exchange rate changes from $1=200 to $1=100, we can say the dollar has (apprec/deprec) in value & Japans exports to the U.S. (incr/decr). Depreciation of the euro 31. Depreciation of the euro relative to the U.S. dollar would make a trip by an American to Europe (more/less) expensive. $1 would buy 800 South Korean won 32. Suppose that yesterday $1 would buy 800 South Korean won, but today will buy 810 won will buy 810 won. We can conclude that the won has (depr/apprec) in value. Slide 40 Losers [anyone buying with pesos] 1. Mexicans who buy American products 2. Mexican businesses that buy supplies from the U.S. 3. American businesses that sell products to Mexico 4. Mexican visitors to the U.S. 5. Those who primarily do business in pesos Winners [anyone buying with dollars] 1. American tourists to Mexico 2. People who send dollars to family or friends in Mexico 3. U.S. businesses that buy from Mexico 4. American consumers who buy Mexican imports 5. Those who primarily do business in dollars $1 = P3.5 $24,000 car = 84,000 pesos $1 = P13.0 $24,000 car = 312,000 pesos Slide 41 2002 FRQ 2002 FRQ real interest rates [RIR] in the U.S. & Japan7% The real interest rates [RIR] in the U.S. & Japan are equal to 7% [say 9%-2%=7%]. real interest rate in the U.S. increases to 8%real interest rate in The real interest rate in the U.S. increases to 8% while the real interest rate in Japan decreases to 6%. financialcapital flows be affected a. How & why will financial capital flows be affected by this change in real interest rates? financial capitalnot real capital [financial capital, not real capital] graph for the yen b. Using a correctly labeled graph for the yen market market, show and explain how the value of the yen will change relative to the value of the dollar. c. Explain how the change in the value of the yen will affect each of the following in the U.S. Imports (1.) Imports from Japan Exports (2.) Exports to Japan 2002 AP Essay on Higher Interest Rates in the U.S. $1.15 $1.00 in A # of Yen # of Yen $/ D2D2D2D2 D1D1D1D1 S E2E2E2E2 E1E1E1E1 (D) [Nominal IR-Inflation = RIR] Slide 42 1. Assume that the U.S. trades with Japan. Draw a correctly labeled graph of the foreign exchange market for the U.S. dollar. Lets say that United States output [GDP] decreases. Show & explain how the supply of the U.S. dollar will be affected in the foreign exchange market.. what will happen to the 2. Given your answer in 1, indicate what will happen to the value of the U.S. dollar relative to the Japanese yen value of the U.S. dollar relative to the Japanese yen. S1$S1$S1$S1$ D$D$D$D$ Quantity of Dollars E1E1E1E1 /$ 100 S2$S2$S2$S2$ E2E2E2E2 120 Answer 1: The decrease in real U.S. output will cause job losses in the U.S. and decrease the dollars supplied for Japanese goods. Answer 2: Due to the decrease in supply of U.S. dollars [as shown above], it will take more yen to purchase a dollar, depreciating the yen and therefore appreciating the dollar.