utube.com/wa tch?v=- qvrRRTBYAk EXCHANGE RATES

 State the factors that influence the level of an exchange rate.  Distinguish between the various types of exchange rate regimes.  Distinguish between exchange rate appreciation and depreciation.  Distinguish between exchange rate devaluation and revaluation. OBJECTIVES

 WHAT WAS THE VALUE OF OUR EXCHANGE RATE?

 The rate at which one currency can be exchanged for another e.g.  TT$6.47 = US$1.00 or  TT$1.00 = US$?Work this out!  What is the importance in trade? EXCHANGE RATES

 Floating  Fixed  Managed TYPES OF EXCHANGE RATES

 Floating Exchange Rates:  Price determined only by demand and supply of the currency – no government intervention  Fixed Exchange Rates:  The value of a currency fixed in relation to an anchor currency – not allowed to fluctuate  Dirty Floating or Managed Exchange Rate: – rate influenced by government via central bank around a preferred rate TYPES OF EXCHANGE RATES

“In April 1993, Trinidad and Tobago adopted a floating exchange rate regime. Since then, the value of the Trinidad and Tobago dollar appreciates or depreciates in response to changes in supply and demand conditions in the foreign exchange market and the intervention policy of the Bank. In practice, the foreign exchange system is a managed float.” market-and-exchange-rate-management-0 market-and-exchange-rate-management-0 IS THE TT$ FIXED, FLOATING OR MANAGED?

 Determined by interaction of demand and supply of foreign currency. FLOATING ER

Demand $US  Import purposes  Investments abroad  Repayment of foreign debt NB. All outflows in the BOP create a demand for foreign currency Supply $US  Export of goods and services  Foreign Direct Investment  Government borrowing from foreign lenders NB. The supply of foreign currency arises from all inflows of foreign exchange in the BOP DETERMINANTS OF DEMAND AND SUPPLY OF $US

Depreciation  Depreciation means that the price of the foreign currency has increased.  Causes  Increase in Demand for US$  Decrease in Supply of US$  Increase in inflation  Increase in national income  Decrease in interest rates  Increase in imports  Increase investments abroad  Repayment of foreign debts Appreciation  Appreciation means that the price of the foreign currency has decreased.  Causes  Decrease in Demand for US$  Increase in Supply of US$  Decrease in inflation  Decrease in national income  Increase in interest rates  Increase in exports  Increase in FDI  Increase in gov’t borrowing CHANGES IN DEMAND AND SUPPLY FOR FOREIGN EXCHANGE

EXCHANGE RATES TT$ per US$ Quantity on ForEx Markets D US$ S US$ 6.40 Q1 Assume an initial exchange rate of US$1 = $6.40TT. There are rumours that the USis going to increase interest rates Investing in the US would now be more attractive and demand for US$ would rise D US$ 1 Q2 Shortage 6.47 Q3 The rise in demand creates a shortage in the relationship between demand for US$ and supply – the price (exchange rate) would rise

1.Referring to the figure, which of the following factors could have caused the increase in supply of US dollars in the Barbados foreign exchange market? a)An increase in interest rates in Barbados b)Lower prices in Barbados c)A depreciation of the Barbados dollar d)None of the above MULTIPLE CHOICE QUESTIONS

2.Any transaction that gives rise to an inflow in the balance of payment creates a a)Demand for foreign currency b)Supply of foreign currency c)Demand for local currency d)None of the above MULTIPLE CHOICE

3.If US interest rates increase but interest rates in other countries remain the same, which of the following is likely to happen? a)The US will experience an outflow of hot money b)The value of US stocks will increase c)The US will experience an inflow of hot money d)The US dollar will depreciate Q3

4.What is likely to cause a rightward shift of the demand for US dollars in Jamaica? a)An increase in imports from the US by Jamaicans b)An increase in the number of US tourists visiting Jamaica c)An increase in interest rates in Jamaica d)An increase in bauxite exports from Jamaica to the US Q4