EXCHANGE RATES
http://www.yo
utube.com/wa
tch?v=qvrRRTBYAk
OBJECTIVES
 State the factors that influence the level of an exchange rate.
 Distinguish between the various types of exchange rate
regimes.
 Distinguish between exchange rate appreciation and
depreciation.
 Distinguish between exchange rate devaluation and
revaluation.
WHAT WAS THE VALUE OF OUR EXCHANGE
RATE?
 http://www.central-bank.org.tt/
EXCHANGE RATES
 The rate at which one currency can be exchanged for another
e.g.
 TT$6.47 = US$1 .00 or
 TT$1.00 = US$?
Work this out!
 What is the importance in trade?
T YPES OF EXCHANGE RATES
 Floating
 Fixed
 Managed
T YPES OF EXCHANGE RATES
Floating Exchange Rates:
 Price determined only by demand and supply of
the currency – no government intervention
Fixed Exchange Rates:
 The value of a currency fixed in relation to an
anchor currency – not allowed to fluctuate
 Dirty Floating or Managed Exchange Rate:
– rate influenced by government via central bank
around a preferred rate
IS THE TT$ FIXED, FLOATING OR MANAGED?
• “In April 1993, Trinidad and Tobago adopted a floating
exchange rate regime. Since then, the value of the Trinidad
and Tobago dollar appreciates or depreciates in response to
changes in supply and demand conditions in the foreign
exchange market and the intervention policy of the Bank. In
practice, the foreign exchange system is a managed float .”
http://www.central-bank.org.tt/content/foreign -exchangemarket-and-exchange-rate-management-0
FLOATING ER
 Determined by interaction of demand and supply of foreign
currency.
DETERMINANTS OF DEMAND AND
SUPPLY OF $US
Demand $US
 Import purposes
 Investments abroad
 Repayment of foreign
debt
NB. All outflows in the
BOP create a demand
for foreign currency
Supply $US
 Export of goods and
services
 Foreign Direct
Investment
 Government borrowing
from foreign lenders
NB. The supply of foreign
currency arises from all
inflows of foreign
exchange in the BOP
CHANGES IN DEMAND AND
SUPPLY FOR FOREIGN EXCHANGE
Depreciation
 Depreciation means that
the price of the foreign
currency has increased.
 Causes
 Increase in Demand for US$
 Decrease in Supply of US$
 Increase in inflation
 Increase in national income
 Decrease in interest rates
 Increase in imports
 Increase investments
abroad
 Repayment of foreign debts
Appreciation
 Appreciation means that
the price of the foreign
currency has decreased.
 Causes
 Decrease in Demand for US$
 Increase in Supply of US$
 Decrease in inflation
 Decrease in national income
 Increase in interest rates
 Increase in exports
 Increase in FDI
 Increase in gov’t borrowing
EXCHANGE RATES
TT$ per US$
SUS$
Assume
an
The
rise in
Investing
in
initial
exchange
demand creates a
rateUS
of US$1
=
the
would
shortage
in
the
$6.40TT.
There
now be more
relationship
are rumours
attractive
between
that the demand
USis
going
toand
and
demand
for
US$
increase
supply
– the price
for
US$
interest
rates
(exchange
would riserate)
would rise
6.47
6.40
DUS$1
Shortage
DUS$
Q1
Q3
Q2
Quantity on
ForEx Markets
MULTIPLE CHOICE QUESTIONS
1. Referring to the figure, which of the following factors could
have caused the increase in supply of US dollars in the
Barbados foreign exchange market?
a)
b)
c)
d)
An increase in interest rates in Barbados
Lower prices in Barbados
A depreciation of the Barbados dollar
None of the above
Bds/US
MULTIPLE CHOICE
2. Any transaction that gives rise to an inflow in the balance of
payment creates a
a)
b)
c)
d)
Demand for foreign currency
Supply of foreign currency
Demand for local currency
None of the above
Q3
3. If US interest rates increase but interest rates in other
countries remain the same, which of the following is likely
to happen?
a)
b)
c)
d)
The
The
The
The
US will experience an outflow of hot money
value of US stocks will increase
US will experience an inflow of hot money
US dollar will depreciate
Q4
4. What is likely to cause a rightward shift of the demand for
US dollars in Jamaica?
a)
b)
c)
d)
An
An
An
An
increase
increase
increase
increase
in
in
in
in
imports from the US by Jamaicans
the number of US tourists visiting Jamaica
interest rates in Jamaica
bauxite exports from Jamaica to the US