The big picture marcoeconomics 12e parkin chapter 09

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W H AT I S E C O N O M I C S ? 75 THE EXCHANGE RATE AND THE BALANCE OF PAYMENTS** The Big Picture Where we have been: Chapter is the last of four that examine the long-run trends of the economy It uses the quantity theory result from Chapter that in the long run, the price level is determined by the quantity of money This result is used to show that in the long run, the nominal exchange rate is determined by the quantities of money in the two countries Chapter also uses the national income accounting identities introduced in Chapter when explaining the balance of payments and, quite importantly, the demand and supply model of Chapter when explaining short-run fluctuations in the exchange rate Where we are going: Chapter is the last of the “long-run chapters.” The next section looks at short-run fluctuations Chapter 10, with its introduction of the aggregate supply/aggregate demand model, is key to understanding short run business cycle fluctuations The material in this chapter is not prominently featured in future chapters, though it makes a slight recurrence in Chapter 14 when monetary policy is covered Chapter 15, on International Trade, does not use the material in this chapter directly However, the global loanable funds market can be used to motivate the models for the global market in goods and services N e w i n t h e Tw e l f t h E d i t i o n This chapter has some sections that have been modified, especially the section on exchange rate expectations It is mostly a modest reorganization of content, so there are no new items to call to your attention However, there is now a section on the Global Loanable Funds Market that was moved from chapter Data in tables and graphs have been updated to 2014 The Economics In The News feature has a 2014 article on the rising value of the dollar The Worked Problem 75 76 presents a scenario in which the Fed and Bank of Japan announce their interest rate policies The students are asked to analyze the announcements using the foreign exchange market and the supply and demand for U.S dollars To include the new Worked Problem without lengthening the chapter, some problems have been removed from the Study Plan Problem and Applications These problems are in the MyEconLab and are called Extra Problems 76 Lecture Notes The Exchange Rate and the Balance of Payments    International trade, borrowing, and lending, make it necessary to exchange currencies and the foreign exchange value of the dollar is determined in the foreign exchange market The exchange rates for currencies are determined by supply and demand in the foreign exchange market When a nation trades with other nations, the country’s balance of payments records the transactions I The Foreign Exchange Market Trading Currencies  International trade, borrowing, and lending, make it necessary to exchange currencies Foreign currency is the money of other countries regardless of whether that money is in the form of notes, coins, or bank deposits The foreign exchange market is the market in which the currency of one country is exchanged for the currency of another The price at which one currency exchanges for another is called the exchange rate Exchange rates: Exchange rates are always somewhat confusing The problem is that there are two ways to express an exchange rate: It can be expressed as the units of foreign currency per U.S dollars (84 yen per U.S dollar) or as U.S dollars per unit of foreign currency (1.28 U.S dollars per Euro) Tell this fact to the students But, because the textbook is consistent in using the exchange rate as the units of foreign currency per U.S dollars, stick to the “84 yen per dollar” format in your lectures This also makes it easier for graphing and for the discussion about appreciation or depreciation A change from 84 to 94 yen per dollar is dollar appreciation and shown by an increase along the vertical axis  Over time, the U.S dollar appreciates and depreciates against other currencies such as the Japanese yen or European euro Currency depreciation is the fall in the value of one currency in terms of another currency Currency appreciation is the rise in the value of one currency in terms of another currency  A rise in the U.S exchange rate is called an appreciation of the dollar; a fall in the U.S exchange rate is called a depreciation of the dollar The Demand for One Money is the Supply of Another Money The exchange rate is determined by demand and supply in the (competitive) foreign exchange market When people holding the money of some other country want to exchange it for U.S dollars, they supply the other currency and demand dollars When people holding U.S dollars want to buy the currency of some other country, they supply U.S dollars and demand the other currency Demand in the Foreign Exchange Market The main factors that influence the dollars that people plan to buy in the foreign exchange market are the exchange rate, world demand for U.S exports, interest rates in the United States and other countries, and the expected future exchange rate  The law of demand in the foreign exchange market is: Other things remaining the same, the higher the exchange rate, the smaller is the quantity of dollars demanded in the foreign exchange market There are two reasons for the law of demand:  Exports Effect: Dollars are used to buy U.S exports The lower the exchange rate, with everything else the same, the cheaper are U.S exports so the greater the 88 CHAPTER  quantity of dollars demanded on the foreign exchange market to pay for the exports  Expected Profit Effect: The lower the exchange rate, with everything else the same (including the expected future exchange rate), the larger the expected profit from buying dollars so the greater the quantity of dollars demanded on the foreign exchange market The law of demand means that the demand curve for U.S dollars is downward sloping, as illustrated in the figure below Supply in the Foreign Exchange Market The main factors that influence the dollars that people plan to sell in the foreign exchange market are the exchange rate, U.S demand for imports, interest rates in the United States and other countries, and the expected future exchange rate   The law of supply in the foreign exchange market is: Other things remaining the same, the higher the exchange rate, the greater is the quantity of dollars supplied in the foreign exchange market There are two reasons for the law of supply:  Imports Effect: Dollars are used to buy U.S imports The higher the exchange rate, with everything else the same, the cheaper are foreign produced imports so the greater the quantity of dollars supplied on the foreign exchange market to buy these imports  Expected Profit Effect: The higher the exchange rate, with everything else the same (including the expected future exchange rate), the smaller the expected profit from holding dollars so the larger the quantity of dollars supplied on the foreign exchange market The law of supply means that the supply curve for U.S dollars is upward sloping, as shown in the figure Market Equilibrium  Demand and supply in the foreign exchange market determine the exchange rate In the figure, the equilibrium exchange rate is 100 yen dollar, where the demand and supply curves intersect  If the exchange rate is higher than equilibrium exchange rate, a surplus dollars drives the exchange rate down  If the exchange rate is lower than equilibrium exchange rate, a shortage of dollars drives the exchange rate up  The market is pulled to the equilibrium exchange rate at which there is neither a shortage nor a surplus per the of the Changes in the Demand for U.S Dollars  A change in any relevant factor other than the exchange rate changes the demand for dollars and shifts the demand curve for dollars  World Demand for U.S Exports: An increase in the world demand for U.S exports increases the demand for U.S dollars because U.S producers must be paid in U.S dollars The demand curve for U.S dollars shifts rightward  U.S Interest Rate Differential: The U.S interest rate differential is the U.S interest rate minus the foreign interest rate The larger the U.S interest rate differential, the greater is the demand for U.S assets and the greater is the T H E E X C H A N G E R AT E A N D T H E B A L A N C E O F PAY M E N T S  demand for U.S dollars on the foreign exchange market An increase in the U.S interest rate differential shifts the demand curve for U.S dollars rightward Expected Future Exchange Rate: The higher the expected future exchange rate, the greater is the expected profit from holding U.S dollars As a result, the demand for U.S dollars increases and the demand curve shifts rightward Changes in the Supply of U.S Dollars  A change in any relevant factor other than the exchange rate changes the supply of dollars and shifts the supply curve of dollars  U.S Demand for Imports: An increase in the U.S demand for imports increases the supply of U.S dollars because U.S importers offer U.S dollars in order to buy the foreign currency necessary to pay foreign producers The supply curve of U.S dollars shifts rightward  U.S Interest Rate Differential: The larger the U.S interest rate differential, the greater is the demand for U.S assets and the smaller is the supply of U.S dollars on the foreign exchange market An increase in the U.S interest rate differential shifts the supply curve for U.S dollars leftward  Expected Future Exchange Rate: The higher the expected future exchange rate, the greater is the expected profit from holding U.S dollars As a result, the supply of U.S dollars decreases and the supply curve shifts leftward Emphasize that the quantity of dollars measured on the horizontal axis are only dollars that are being offered for foreign exchange, not the entire quantity of money as we learned in Chapter Changes in the Exchange Rate The exchange rate changes when the demand for and/or the supply of foreign exchange change  When the expected future U.S exchange rate increases, the demand for U.S dollars increases and the supply decreases As the figure shows, the demand curve shifts rightward, from D0 to D1, and the supply curve shifts leftward, from S0 to S1 The exchange rate rises, in the figure from 77 yen per dollar to 102 yen per dollar, and quantity traded does not change by much, indeed in the figure it does not change at all Such changes took place between 2012 and 2014 when traders started to expect that the Federal Reserve would raise the interest rate in the United States while the Japanese interest rate would not change II Arbitrage, Speculation, and Market Fundamentals Exchange rate expectations depend on deeper economic forces that influence the value of money  Arbitrage is the practice of seeking to profit by buying in one market and selling for a higher price in another related market Arbitrage in the foreign exchange market and international loans markets and goods markets achieves four outcomes:  The law of one price: If an item is traded in more than one place, the price will be the same in all locations An example of this law is that the exchange rate 89 90 CHAPTER    between the U.S dollar and the U.K pound is the same in New York as it is in London No round-trip profit: A round trip is using currency A to buy currency B, and then using B to buy A A round trip might involve more stages, using B to buy C and then using C to buy A Regardless, arbitrage removes the profit made from a round trip Interest rate parity: Borrowers and lenders must choose the currency in which to denominate their assets and debts Interest rate parity, which means equal rates of return across currencies, means that for risk-free transactions, there is no gain from choosing one currency over another Purchasing power parity: Purchasing power parity, which means equal value of money, is the idea that, at a given exchange rate, goods and services should cost the same amount in different countries Purchasing power parity is an important force affecting prices and exchange rates in the long run and influences exchange rate expectations Interest Rate Parity Be sure that your students appreciate interest rate parity There are many horror stories of people losing their shirts by misunderstanding interest rate parity One story concerns the once wealthy Catholic Church of Australia that decided to borrow in Japan at a low interest rate and lend the proceeds of its borrowing in Australia at higher interest rates When the Australian dollar nosedived against the Japanese yen, the church struggled to repay its loans Interest rate parity always holds Interest rates might look unequal, but the market expectation of the change in the exchange rate equals the gap between interest rates It is a foolish person (or organization) that acts as if it can beat the market If one U.S dollar exchanges for 1.33 Canadian dollars, then purchasing power parity is attained when one U.S dollar buys the same quantity goods and services in the United States as 1.33 Canadian dollars buys in Canada  If one U.S dollar buys more goods and services in the United States than 1.33 Canadian dollars buy in Canada, people will expect that the U.S dollar will eventually appreciate  Similarly, if one U.S dollar buys less goods and services in the United States than 1.33 Canadian dollars buy in Canada, people will expect that the U.S dollar will eventually depreciate The Economics in Action detail discusses the “Big Mac Index.” The Economist reports a Big Mac Index that uses the prices of McDonald’s Big Macs and purchasing power parity to make predictions about exchange rate movements The index is somewhat tongue-incheek as it would be hard to arbitrage differences in Big Mac prices by taking a Big Mac on a plane from, say, Japan to the United States However, it is easier to arbitrage the inputs into Big Macs such as beef Thus, one might still expect some convergence of Big Mac prices over time The Economist claims some success in its exchange rate predictions Speculation Speculation is trading on the expectation of making a profit Speculation contrasts with arbitrage, which is trading on the certainty of making a profit Most foreign exchange transactions are based on speculation, which explains why the expected future exchange rate plays such a central role in the foreign exchange market Changes in the expected future exchange rate instantly change the current exchange rate T H E E X C H A N G E R AT E A N D T H E B A L A N C E O F PAY M E N T S Market Fundamentals The fundamentals underlying the exchange rate are the demand for U.S dollars, which depends on world demand for U.S exports, and the supply of U.S dollars, which depends on U.S demand for imports Both demand and supply depend on the U.S interest rate differential The Real Exchange Rate  The nominal exchange rate is the value of the U.S dollar expressed in units of foreign currency per U.S dollar It tells how many units of a foreign currency one U.S dollar buys The real exchange rate is the relative price of U.S-produced goods and services to foreign-produced goods and services It tells how many units of foreign GDP one unit of U.S GDP buys The real exchange rate, RER, is equal to RER = (E  P)/P*  where E is the nominal exchange rate, P is the U.S price level, and P* is the foreign price level Price Levels and Money: Nominal and real exchange rates are linked by the equation RER = E  (P/P*) This relationship can be used in the short run and long run:  Short Run: In the short run, this equation determines the real exchange rate The nominal exchange rate is determined in the foreign exchange market by the supply and demand for dollars Price levels not change rapidly and so any change in the nominal exchange rate translates into a change in the real exchange rate  Long Run: In the long run, rewrite the equation as E = RER  (P*/P) In the long run, the real exchange rate is determined by the supply and demand for imports and exports and the price level in each nation is determined by the quantity of money in that nation So in the long run, a change in the quantity of money changes the price level and thereby changes the nominal exchange rate This result means that in the long run, the nominal exchange rate is a monetary phenomenon Chapter showed that in the long run, the quantity of money determines a nation’s price level, so the nominal exchange rate is determined by the quantities of money in the two countries 91 92 CHAPTER III Exchange Rate Policy Because the exchange rate is the price of a country’s money, governments and central banks must have a policy toward the exchange rate Three possible exchange rates policies are Flexible Exchange Rate  A flexible exchange rate policy permits the exchange rate to be determined by demand and supply with no direct intervention by the central bank Even so, the exchange rate is influenced by the central bank’s actions For instance, if the Fed raises the U.S interest rate, the U.S interest rate differential increases, which appreciates the U.S exchange rate Most countries, including the United States, have flexible exchange rates Fixed Exchange Rate  A fixed exchange rate policy pegs the exchange rate at a value determined by the government or the central bank and blocks the unregulated forces of supply and demand by direct intervention in the foreign exchange market A fixed exchange rate requires direct and frequent intervention by the central bank  If the demand for dollars decreases or the supply of dollars increases, to fix the exchange rate the Fed buys U.S dollars By so doing the Fed increases the demand for dollars and raises the exchange rate But the Fed cannot pursue this policy forever because it eventually will run out of the foreign reserves it is using to purchase the dollars  In the figure the demand for dollars has decreased from D0 to D1 To keep the exchange rate fixed at 100 yen per dollar, the Fed needs to buy billion dollars per day, the difference between the quantity of dollars supplied at the fixed exchange rate (7 billion dollars per day) and the [new] quantity of dollars demanded (5 billion dollars per day) To purchase these dollars the Fed must use its foreign reserves Ultimately the Fed will run out of foreign reserves and when that takes place the Fed can no longer peg the exchange rate at 100 yen per dollar  If the demand for dollars increases or the supply of dollars decreases, with no intervention the exchange rate will rise To fix the exchange rate the Fed sells U.S dollars so that it increases the supply of dollars and lowers the exchange rate But the Fed will accumulate large stocks of the foreign reserves it is accepting in payment for the dollars The People’s Bank of China pursued such a policy to hold down the value of the yuan and while so doing accumulated billions of dollars of U.S dollars Crawling Peg  A crawling peg policy selects a target path for the exchange rate with intervention in the foreign exchange market to achieve that path A crawling peg works like a fixed exchange rate only the target value changes The target changes whenever the central bank changes China is now currently using a crawling peg exchange rate policy for the yuan T H E E X C H A N G E R AT E A N D T H E B A L A N C E O F PAY M E N T S The People’s Bank of China in the Foreign Exchange Market (Economics In Action Detail)    From 1997 until 2005, the People’s Bank of China fixed the Chinese exchange rate by selling yuan and buying dollars to offset the effects of increases in the demand for yuan China accumulated foreign currency reserves of almost $1 trillion by mid2006, and by the end of 2007 was fast approaching $2 trillion Since 2005, the People’s Bank has allowed the yuan to crawl upward Even so the yuan has not risen to its equilibrium level, hence the People’s Bank must buy U.S dollars to hold the yuan/dollar exchange rate down China most likely fixed its exchange rate to anchor its inflation rate so that it does not deviate much from the U.S inflation rate The Chinese inflation rate departs from the U.S inflation rate by an amount determined by the speed of the crawl IV Financing International Trade Balance of Payments Accounts   A country’s balance of payments accounts records its international trading, borrowing, and lending There are three balance of payments accounts:  The current account records payments for imports of goods and services from abroad, receipts for exports of goods and services sold abroad, net interest income paid abroad, and net transfers (such as foreign aid payment) The current account balance equals exports plus net interest income plus net transfers minus imports  The capital account records foreign investment in the United States minus U.S investment abroad Any statistical discrepancy is included in this account  The official settlements account records the change in U.S official reserves, which are the government’s holdings of foreign currency An increase in foreign reserves corresponds to a negative official settlements account balance This occurs because holding foreign currency is like (but not the same as) investing abroad, which is a negative entry in the capital account The sum of the balances always equals zero: current account + capital account + official settlements account =  In 2013, the U.S current account balance was negative and almost entirely offset by a positive capital account balance Over time, the current account balance tends to mirror the capital account balance because the official settlements account balance is small Borrowers and Lenders Because of current account deficits and surpluses, countries, like individuals, can be borrowers or lenders  A country that is borrowing more from the rest of the world than it is lending to it is a net borrower A net lender is a country that is lending more to the rest of the world than it is borrowing from the rest of the world The United States currently is net borrower Being a net borrower is not a problem provided the borrowed funds are used to finance capital accumulation that increases income Being a net borrower is a problem if the borrowed funds are used to finance consumption The Global Loanable Funds Market Demand and Supply in Global and National Markets  Demand and supply in the world global loanable funds market determines the world equilibrium real interest rate 93 94 CHAPTER  A country is a net foreign borrower if the world equilibrium real interest rate is less than what would be the no-trade interest rate in the country The figure shows this situation  In the figure, when the country is isolated from international trade the equilibrium real interest rate would be percent and the equilibrium quantity of loanable funds would be $1.6 trillion  With international trade, the real interest rate in the country becomes the world real interest rate, percent At this lower real interest rate, the quantity of loanable funds supplied decreases to $1.4 trillion and the quantity of loanable funds demanded increases to $1.8 trillion The difference, $0.4 trillion, is borrowed from abroad The country has negative net exports, with X < M  A country is a net foreign lender if the world equilibrium real interest rate exceeds what would be the no-trade interest rate in the country The figure shows this situation  In the figure, when the country is isolated from international trade the equilibrium real interest rate would be percent and the equilibrium quantity of loanable funds would be $1.6 trillion  With international trade, the real interest rate in the country becomes the world real interest rate, percent At this higher real interest rate, the quantity of loanable funds supplied increases to $1.8 trillion and the quantity of loanable funds demanded decreases to $1.4 trillion The difference, $0.4 trillion, is loaned abroad The country has positive net exports, with X > M In a small country, changes in the national demand and supply of loanable funds change the country’s international loaning or borrowing and will change the country’s net exports  Debtors and Creditors  A debtor nation is a country that during its entire history has borrowed more from the rest of the world than it has lent to it A creditor nation is a country that during its entire history has invested more in the rest of the world than other countries have invested in it The United States currently is debtor nation  The net borrower/net lender difference refers to the current flow of borrowing or lending over a period of time The debtor nation/creditor nation refers to the stock of debt or foreign assets that exists at a moment in time The analogy of a country being like an individual in terms of being a borrower or lender is revealing However, you may want to point out a big difference in lifespan Long periods of T H E E X C H A N G E R AT E A N D T H E B A L A N C E O F PAY M E N T S deficit seem bad for an individual, but are short when you are expected to live forever Much economic activity and development would be impossible without borrowing and lending This is true at the individual level and for countries The key is what the debt is being spent on The United States financed its industrialization and railroads in the nineteenth century by being a debtor nation Current Account Balance and Net Exports  The current account balance (CAB) is:  The main item in the current account balance is net exports (X − M) The other two items are much smaller and don’t fluctuate much The national accounts show that Y = C + I + G + X  M and also that Y = C + S + T These two relationships can be equated and rearranged to give (X  M) = (S  I) + (T  G) In this formula,  (X  M) is net exports, exports of goods and services minus imports of goods and services  (S  I) is the private sector balance, saving minus investment  (T  G ) is the government sector balance, net taxes minus government expenditures on goods and services The formula shows that net exports equal the sum of the private sector balance and the government sector balance There is a strong tendency for the private sector balance and the government sector balance to move in opposite directions, which means that the relationship between net exports and the other two sectors taken individually is not a strong one CAB = X − M + Net interest income + Net transfers   Where Is the Exchange Rate? In the short run, a change in the nominal exchange rate changes the real exchange rate and affects the U.S current account balance In the long run, a change in the nominal exchange rate leaves the real exchange rate unaffected and so in the long the nominal exchange rate plays no role in determining the current account balance 95 96 CHAPTER Additional Problems The Dollar’s Short-Lived Comeback The dollar fell to record lows against the euro in April Over the next month the exchange rate rose because traders began to expect that the Federal Reserve was not going to cut U.S interest rates any further CNN, May 16, 2008 Explain how expectations that the Federal Reserve will not cut the interest rate can make the dollar appreciate Suppose that traders in the foreign exchange market come to believe that the U.S exchange rate will rise over the next few months How does this belief affect the demand for U.S dollars and the supply of U.S dollars? What is the impact of this belief on the current exchange rate? Draw a graph of the foreign exchange market to illustrate your answer A country has a lower inflation rate than all other countries It has more rapid economic growth The central bank does not intervene in the foreign exchange market What can you say (and why) about: a The exchange rate? b The current account balance? c The expected exchange rate? d The interest rate differential? e Interest rate parity? f Purchasing power parity? Solutions to Additional Problems If traders come to believe that the Federal Reserve will not cut interest rates, the interest rate in the future will be higher than previously expected With the higher future U.S interest rate, the future U.S interest rate differential will also be higher In turn, the higher future U.S interest rate differential will raise the future U.S exchange rate Finally, the expected higher future U.S exchange rate increases the current demand for U.S dollars and decreases the current supply, thereby raising the current exchange rate and appreciating the dollar T H E E X C H A N G E R AT E A N D T H E B A L A N C E O F PAY M E N T S The rise in the expected future exchange rate increases the expected profit from holding dollars The increase in expected profit increases the current demand for U.S dollars and decreases the current supply of U.S dollars The current exchange rate rises Figure 9.1 shows the effect on the foreign exchange market of the change in traders’ beliefs The demand increases so the demand curve for dollars shifts rightward from D0 to D1 The supply curve of dollars shifts leftward from S0 to S1 The dollar immediately appreciates, rising in the figure from 110 yen per dollar to 120 yen per dollar a The exchange rate most likely rises—the currency appreciates The reason is that to preserve purchasing power parity, the lower inflation rate means that the currency must appreciate b The current account balance depends on domestic investment relative to national saving The balance could be positive or negative Possibly with more rapid growth, investment in the country is high and so the current account might be in deficit c The exchange rate will be expected to appreciate so the expected future exchange rate is higher than the current exchange rate d The interest rate differential is negative The interest rates in other countries exceed the domestic interest rate by an amount equal to the expected exchange rate appreciation e Interest rate parity holds every day If it did not, large above-average profits would be available Such profit opportunities not go unexploited f Purchasing power parity probably doesn’t hold every day, but does hold on the average in the long run Additional Discussion Questions In 20072008, the nominal exchange rate of U.S dollars declined relative to both the Japanese yen and the European euro What would you need to know about the U.S economy to determine whether this would be a benefit or a problem for the U.S economy? Point out that the United States was just starting to enter a recession in 2008, as potentially was Japan and most of Europe The Federal Reserve was ahead of other central banks in responding to the recession by lowering the interest rate before the other central banks took action By lowering the U.S interest rate, the U.S interest rate differential decreased, which decreased the demand for U.S dollars, increased the supply of U.S dollars, and forced the exchange rate lower By lowering the U.S exchange rate, U.S exports increased, which 97 98 CHAPTER helped keep the U.S economy stronger than otherwise would have been the case When the Federal Reserve Chairman Ben Bernanke repeatedly decreased the interest rate during late 2008, he was attempting to stimulate the U.S economy by lowering the interest rates in the U.S financial markets and lowering the cost of employing productive capital What impact did this policy have on the exchange rates in the foreign exchange markets, all else equal? The fall in U.S interest rates means that the U.S interest rate differential falls The fall in the interest rate differential increases the supply of dollars to the foreign currency exchange market, shifting the supply curve of dollars rightward It also decreases the demand for dollars, shifting the demand curve for dollars leftward With no other changes, the equilibrium exchange rate for dollars falls As it happened, however, other factors were not equal In late 2008 other central banks also lowered their interest rates And apparently investors believed that the United States had less default risk than other countries So on net the demand for dollars actually increased and the supply decreased so that the U.S exchange rate rose But the increase would have been significantly greater had it not been for the actions of the Federal Reserve In part due to the recession of 2008, the U.S government budget changed from a smaller deficits to larger deficits What impact would this have on the net exports and private sector balances, all else equal? The three balances are related: Net exports equal the sum of government and private sector balances If the private sector balance does not change, the net export deficit will increase However if the public sector surplus were to increase substantially, the net export deficit might decrease ... rates in the United States and other countries, and the expected future exchange rate  The law of demand in the foreign exchange market is: Other things remaining the same, the higher the exchange... else the same, the cheaper are U.S exports so the greater the 88 CHAPTER  quantity of dollars demanded on the foreign exchange market to pay for the exports  Expected Profit Effect: The lower the. .. supply in the foreign exchange market is: Other things remaining the same, the higher the exchange rate, the greater is the quantity of dollars supplied in the foreign exchange market There are
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