by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
What is a Bank Balance Sheet? A balance sheet is an accounting tool that lists assets and liabilities. An asset is something of value that you own and you can use to produce something. For example, you can use the cash you own to pay your tuition. If you own a home,...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
What is an Exchange Rate Policy? Exchange rate policies come in a range of different forms. Let the foreign exchange market determine the exchange rate; let the market set the value of the exchange rate most of the time, but have the central bank sometimes intervene...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
What is a Merged Currency? An approach to exchange rate policy is for a nation to choose a common currency shared with one or more nations is also called a merged currency. A merged currency approach eliminates foreign exchange risk altogether. Just as no one worries...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
What Causes Exchange Rate Fluctuations? For firms that depend on export sales, or firms that rely on imported inputs to production, or even purely domestic firms that compete with firms tied into international trade—which in many countries adds up to half or more of a...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
How Do Exchange Rates Affect Aggregate Demand and Aggregate Supply? Foreign trade in goods and services typically involves incurring the costs of production in one currency while receiving revenues from sales in another currency. As a result, movements in exchange...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
Why do Central Banks Care About Exchange Rates? A central bank will be concerned about the exchange rate for multiple reasons: (1) Movements in the exchange rate will affect the quantity of aggregate demand in an economy; (2) frequent substantial fluctuations in the...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
How does Relative Inflation Shifts Demand and Supply for a Currency? If a country experiences a relatively high inflation rate compared with other economies, then the buying power of its currency is eroding, which will tend to discourage anyone from wanting to acquire...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
How do changes in the expected rate of return shift demand and supply for a currency?The motivation for investment, whether domestic or foreign, is to earn a return. If rates of return in a country look relatively high, then that country will tend to attract funds...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
How do Expectations about Future Exchange Rates Shift Demand?One reason to demand a currency on the foreign exchange market is the belief that the currency’s value is about to increase. One reason to supply a currency—that is, sell it on the foreign exchange...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
What are Dealers in the Interbank Market? Most people and firms who are exchanging a substantial quantity of currency go to a bank, and most banks provide foreign exchange as a service to customers. These banks (and a few other firms), known as dealers, then trade...
