Exchange Rates Lesson 14 – Money around the world
Exchange Rate • The price of one nation’s currency in terms of another nation’s currency • Fixed – prevented from rising and falling with changes in supply and demand • Flexible – free to float with changes in the supply and demand
Factors that affect exchange rates • Changes in preferences for foreign goods • Relative incomes • Inflation • Interest rates • Speculation on future values of foreign exchange
Changes in preferences • More Americans want to buy Japanese goods – yen would be worth more dollars because demand for yen would increase and supply of US dollars would decrease
Changes in prices in different countries • High inflation in Russia would make Russian goods more expensive than American goods. Russians would demand more US $$ to buy cheap US goods (supply more Russian rubles, demand more US $$$) dollar would be worth more
Changes in interest rates in different countries • 10% on savings in Europe and 2% savings in US, Americans would demand more Euros and supply more $$$ • Euro would be worth more dollars
Changes in income in different countries • Income in US increases compared to Mexico. People in the US buy more Mexican goods. More supply of US $$$ and more demand for pesos • Dollar would be worth fewer pesos
Speculation • People think the dollar will increase in value compared to the Euro, they will buy more $$$ (demand) and sell more Euros(supply) • Dollar would be worth more Euros
If the foreign exchange rate between the Australian Dollar and the Indian Rupee is 1:1.57 then 3 Indian Rupees equals how many Australian Dollars?
If the foreign exchange rate between the American Dollar and the Australian Dollar is 1:1.50 then 24 Australian Dollars equals how many American Dollars?
If the foreign exchange rate between the Australian Dollar and the Hong Kong Dollar is 1:2.80 then 56 Australian Dollars equals how many Hong Kong Dollars?
If the foreign exchange rate between the Mexican Peso and the Botswana Pula is 1:0.40 then 85 Mexican Pesos equals how many Botswana Pulas?
3 currencies • 1 WELCO = 2 DEVCOs • 1DEVCO = 2 LESCOs • 1 WELCO = 4 LESCOs • If a bicycle cost 25 DEVCOs, what is the price in WELCOs? LESCOs?
Depreciating currency • A currency depreciates when it buys less of another currency
Effects of Depreciation • If you go to Italy on vacation and the $ is worth less, you have less money to buy local souvenirs. • If you are an American business and you buy parts from France, your resource costs will increase • If you are a Japanese firm and you buy solar equipment from the United States, you will buy more
Appreciating currency • A currency appreciates when it buys more of another currency
If you go to Japan on vacation and the $ is worth more, you have more money to buy local souvenirs. • If you are an American business and you buy parts from Spain, your resource costs will decrease • If you are an Israeli firm and you buy planes from the United States, you will buy less