Chat with AIExam 14: Exchange Rates and Their Determination: A Basic Model
What is the difference between direct and indirect quotes of the exchange rate? Give an example of each.
(34) 
VerifiedExchange rates can be quoted as either domestic currency per unit of foreign currency (a direct quote) or units of foreign currency per unit of domestic currency (an indirect quote). The exchange rate between the dollar and the Japanese yen is usually reported as yen per dollar- indirect quote. The direct quote is one yen is worth approximately one U.S. penny. So the exchange rate of 110 yen to the dollar is somewhat easier to think about than .0090909 dollars per yen.
Describe what the terms appreciation and depreciation mean.
(32) VerifiedAn increase in the value of a currency is referred to as appreciation. Analogously, a decline in the value of the currency is referred to as depreciation.
If domestic income is increasing rapidly and domestic prices are rising faster than foreign prices, what will happen to the exchange rate?
(35) VerifiedAn increase in domestic incomes would cause the exchange rate to increase, and higher domestic inflation relative to the foreign country would also cause the exchange rate to increase. As a result of these two factors, the home currency would be expected to depreciate against the foreign currency.
Why does the supply of foreign exchange slope upwards? What factors would cause this curve to shift?
(41) Why does the demand for foreign exchange slope downwards and to the right? What factors would cause this curve to shift?
(37) Explain how exchange rate volatility tends to lower the amount of international trade.
(40) Suppose that you had to forecast the exchange rate for a country for the next year. What factors would you have to consider?
(40) The equilibrium exchange rate tends to change frequently, why does this occur?
(37) Suppose that inflation in the U.S. is 2 percent and 5 percent in the U.K. Show what would happen to the dollar/pound exchange rate?
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