Exchange Rate

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Supply of Money in the Money Market

In the money market of the Monetary Approach to Balance of Payment (MBOP), the central bank controls the nominal money supply (MS). Given the average price level, the nominal money supply [more…]

Establish Money Market Equilibrium

A market has a demand and a supply curve that shows the demand for and supply of the good in question. When you put together the money demand and supply curves, you can view the money market. [more…]

Asset Approach to Exchange Rate Determination

You can compare the real returns on dollar-denominated securities with the real returns on euro-denominated securities. The concept that makes this comparison possible is the expected change in the exchange [more…]

The Expected Real Returns Curve, or Parity Curve

The interest parity can be represented as a curve, called the expected real returns curve or the parity curve. This is one of the curves that can be used to describe the foreign exchange market. [more…]

Combine the Money Market with the Foreign Exchange Market

Combining the money market and the foreign exchange market in the Monetary Approach to Balance of Payment (MBOP) makes it possible to relate the change in the money market of one of the countries to the [more…]

Apply Relative Price to Exchange Rates

An exchange rate is a relative price because it represents the price of one currency in terms of another currency. Assume that the dollar is the domestic currency and the euro is the foreign currency. [more…]

What Are Real Exchange Rates?

The real exchange rate (RER) compares the relative price of two countries’ consumption baskets. You may be interested in getting more information than the relative price of two currencies, or the nominal [more…]

What Are Effective Exchange Rates?

Effective exchange rates compare a country’s currency to a basket of other countries’ currencies. The most common way to identify the basket of currencies is to consider a country’s major trade partners [more…]

How to Calculate the Percent Change

The percent change formula is a basic but useful tool. You can apply it to any variable that’s observed at various points in time. For all variables for which you want to measure the percent change, use [more…]

What Are Appreciation and Depreciation?

When you use the term appreciation or depreciation, make sure you’re referring to currencies that are traded in foreign exchange markets with no government interventions. A country may unilaterally peg [more…]

Exchange Rate as the Price of Foreign Currency

The dollar–euro exchange rate implies the price of the euro in dollars. You can use this exchange rate to convert a dollar amount into euros, or vice versa. [more…]

Exchange Rate as the Price of Domestic Currency

Working with the euro–dollar exchange rate implies the price of the dollar in euros. You can use this exchange rate to convert a dollar amount into euros, or vice versa. [more…]

How to Calculate Cross Rates

The idea of cross rates implies two exchange rates with a common currency, which enables you to calculate the exchange rate between the remaining two currencies. [more…]

Output and Exchange Rates

Just to clarify the terminology, output refers to a country’s real gross domestic product (GDP). Because real GDP is adjusted for the changes in inflation [more…]

Inflation Rates and Exchange Rates

Most theories of exchange rate determination predict depreciation in the higher-inflation country’s currency. Inflation refers to an increase in the average price level of a country, which is frequently [more…]

What Is an Exchange Rate Regime?

The exchange rate between two currencies may be determined in international foreign exchange markets or in a government office. If an exchange rate — say, the yen–dollar rate — is determined in international [more…]

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