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Currencies as part of Supply and DemandAll major currencies of the world “float” on supply and demand markets. Some minor currencies are “pegged” to other major currencies like the US dollar and the Euro, but rise and fall in value with those major currencies.The only major currency that is mostly “fixed” in exchange rates by governmental decree is the People’s Republic of China’s Yuan. The Chinese government does adjust the “fixed” rate occasionally, most recently as a response to US pressure to balance trade issue flaws.Currencies either “appreciate” or “depreciate” in EP.When changes occur between two countries’ economies, the currencies will reflect those changes:Always change the D line on one currency graph, the S line on the other currency’s graph.One currency will appreciate, the other will depreciate.Move the lines of the two currency graphs the same direction and you will end up with the correct answer.How do currencies move?Fads, tastes, and political actions like boycotts, occur in a country as it deals with another country.The country with less inflation has the more attractive economy compared to a trading partner.The country with better investment opportunities (higher real interest rates for investments) has the more attractive economy.The country “expected” to improve its economic standing more quickly than trading partners will have the more attractive economy.If the overall real wealth of one country improves, compared to the wealth of a trading partner, the improving country will have the more attractive economy.Major Determinants of Currency MovementsCountries trade currencies for:Exports and ImportsInvestmentsIf a country has products that are popular, then demand for that country’s currency increases.If a country does objectionable things and its products are boycotted, demandfor that country’s currency decreases.If a country has lower inflation rates than trading partners, then demand for that country’s currency increases. Foreign investors seek lower inflation rates.If a county’s real interest rates provide better returns on investments than itstrading partners, demand for that country’s currency will increase. Foreign investors seek higher real interest rates.If a country is expected to have more economic growth than its trading partnersthen demand for that country’s currency increases.Currency Exchanges (Currencies as S and D Markets)Graph both currencies.Label them as either “appreciating” or “depreciating” in value.Tell what happens to US Exports after the change.US $ and the Mexican Peso (M$):Drug wars in Mexico cause US tourists to stay away from Mexico.US $ and the Euro (€):US goes into deep recession, Europe does not.US $ and the Japanese Yen (?):Japanese game companies bring out hugely popular new game systems.US $ and the Chinese Yuan (C? or ):China decides to reduce sales of rare earth minerals to the US.(Assume that the Yuan trades on S and D markets.)US $ and the Canadian Dollar (C$)After the Calgary Winter Olympic Games, Canada becomes a favorite US tourist destination.US $ and the Chilean Peso (CLP$):The two countries sign a trade agreement that dramatically increases the food Chile will export to the US during the winter in the northern hemisphere.US $ and the Euro (€):Gasoline prices spike to $20.00 a gallon worldwide and German car companies introduce several models of cars that get 75 miles per gallon in efficiency and US consumers want those cars.US $ and the Australian Dollar (A$):After massive flooding in Australia, the US decides to send billions in aid money to Australia.US $ and the Russian Ruble ( R ):Russians decide that US cars are extremely fashionable to own.US $ and the Nigerian Naira ( N ):The US increases investments in newly discovered oil fields in Nigeria. ................
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