Chapter 9

Foreign Currency

Foreign bank notes, coins, and bank deposits used to purchase goods and services produced in another country.

Foreign Exchange Market

The market in which one country's currency is exchanged for another's currency.

Foreign Exchange Rate

The price at which one currency exchanges for another.

Currency Depreciation

A fall in the value of one currency in terms of another currency.

Currency Appreciation

A rise in the value of one currency in terms of another currency.

Law of Demand for Foreign Exchange

As the exchange rate rises, the quantity of Canadian dollars demanded decreases.

Exports Effect

As the value of Canadian exports increases, the quantity of Canadian dollars demanded increases.

Expected Profit Effect

The greater the expected profit from holding Canadian dollars, the greater the quantity of Canadian dollars demanded today.

Imports Effect

The higher the value of Canadian imports, the higher the quantity of Canadian dollars supplied on the foreign exchange market.

Equilibrium Exchange Rate

The exchange rate at which there is neither a shortage nor a surplus of Canadian dollars.

Interest Rate Parity

The condition that exists when returns on two currencies are equal, accounting for exchange rate changes.

Purchasing Power Parity (PPP)

The situation where two quantities of money can buy the same quantity of goods and services.

Arbitrage

The practice of seeking to profit by buying in one market and selling for a higher price in another.

Flexible Exchange Rate

An exchange rate policy that allows the rate to be determined by demand and supply without intervention.

Fixed Exchange Rate

An exchange rate policy that pegs the rate at a value decided by the government or central bank.

Crawling Peg

An exchange rate that follows a path determined by a decision of the government or central bank.