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ECON302: Money, Banking, And Financial Markets

Unit 5: Foreign Exchange   Foreign exchange markets are marketplaces in which the currencies of different countries are bought and sold.  Market transactions transfer the currency of one country into that of another and thereby settle accounts.  Within foreign exchange markets, currencies are bought either “spot” or “forward.”  In a spot market, currencies are bought immediately and exchange rates (for example, 1 dollar to 78 Euros) are managed by the governments.  In forward markets, currencies are bought and sold for future transactions.  Forward rates are largely determined by the market’s expectations for currency appreciation or depreciation at a future date.

Unit 5 Time Advisory
This unit should take you 9.5 hours to complete.

☐    Subunit 5.1: 2.0 hours

☐    Subunit 5.2: 2.0 hours

☐    Subunit 5.3: 2.5 hours

☐    Assessments: 3 hours

Unit5 Learning Outcomes
Upon successful completion of this unit, the student will be able to:
- Explain the function of the foreign exchange market.

  • Discuss the factors that affect the demand and the supply of foreign exchange.
  • Define equilibrium exchange rate.
  • Explain the behavior of exchange rates in the short- and long-terms.
  • Discuss and contrast the different foreign exchange rate regimes.
  • Explain the effect of monetary policy on the exchange rate.
  • Explain how the exchange rate affect the economy.

5.1 The Foreign Exchange Market   Note: Exchange rate movements are extremely important to our economy.  This section develops a modern analysis of exchange rate determination that explains both recent behavior in the foreign exchange market, and why exchange rates are so volatile from day to day.

  • Lecture: Vimeo: Gresham College’s “The Seven Rules of Foreign Exchange Markets - Professor Avinash Persaud” Link: Vimeo: Gresham College’s “The Seven Rules of Foreign Exchange Markets - Professor Avinash Persaud” (Vimeo)
     
    Instructions: Watch this video lecture, which discusses the foreign exchange market.
     
    Terms of Use: This resource is licensed under a Creative Commons Attribution-ShareAlike 3.0 Unported license. It is attributed to Gresham College and the original version can be found here

  • Reading: Money and Banking: “Chapter 18: Foreign Exchange” Link: Money and Banking: “Chapter 18: Foreign Exchange” (PDF)

    Instructions: Please note this reading provides information for sections 5.1.1-5.1.3.  When you click on the link above, you will be directed to “Chapter 18: Foreign Exchange” of an on-line book Money and Banking.  Please read Chapter 18 in its entirety.

    Terms of Use: The text was adapted by The Saylor Foundation under a Creative Commons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensee.

  • Web Media: Vimeo.com: Stephen Kinsella’s “Chapter 13: Exchange Rates, Forwards, and Futures” Video Lecture Link: Vimeo.com: Stephen Kinsella’s “Chapter 13: Exchange Rates, Forwards, and Futures”Video Lecture (Adobe Flash)
     
    Instructions: Please note this video covers the topics outlined in sections 5.1.1-5.1.3.  When you click on the link above, you will be directed to Stephen Kinsella’s video lectures titled “Chapter 13: Exchange Rates, Forwards, and Futures.”  Please watch the video (8:18 minutes) in its entirety.
     
    Note on the Media: Lecturer, Stephen Kinsella, teaches economics at the University of Limerick.
     
    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

5.1.1 Exchange Rates in the Long Run   5.1.2 Exchange Rates in the Short Run   5.1.3 Explaining Changes in Exchange Rates   - Assessment: Pearson Education: Frederic S. Mishkin’s “Chapter 20: The Foreign Exchange Market”: “Multiple Choice Quiz” Link: Pearson Education: Frederic S. Mishkin’s “Chapter 20: The Foreign Exchange Market”: “Multiple Choice Quiz” (HTML)
 
Instructions: This quiz will assess what you have learned in sections 5.1.1-5.1.3.  When you click on the link above, you will be directed to Frederic S. Mishkin’s multiple choice quiz on “Chapter 20: The Foreign Exchange Market.”  After you finish the 15 questions of the quiz, please click “Submit Answers for Grading” to check your answers.
 
Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

5.2 The International Financial System   Note: The growing interdependence of the United States with other economies of the world means that our monetary policy is influenced by international financial transactions.  This section examines the international financial system and explores how it affects the way our monetary policy is conducted.  Also, this section looks at the structure of the international financial system and how that structure affects monetary policy. Finally, we will look at the evolution of the international financial system during the past half century.

  • Reading: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 20: The International Financial System” Lecture Notes Link: Pearson Education Canada’s version of Frederic S. Mishkin’s “Chapter 20: The International Financial System” Lecture Notes (Microsoft Powerpoint)
     
    Instructions:  When you click on the link above, you will be directed to a webpage that lists links to lecture notes on specific chapters from Mishkin's The Economics of Money, Banking, and Financial Markets.  Click on the "Chapter 20" link to download the presentation. Please read all of the slides for Chapter 20 for information that covers sections 5.2.1-5.2.6.

      
    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

  • Reading: Money and Banking: “Chapter 19: International Monetary Regimes” Link: Money and Banking: “Chapter 19: International Monetary Regimes” (PDF)

    Instructions: This reading covers the topics for sections 5.2.1-5.2.6.  When you click on the link above, you will be directed to “Chapter 19: International Monetary Regimes” of an on-line book Money and Banking.  Please read Chapter 19 in its entirety.
     
    Terms of Use: The text was adapted by The Saylor Foundation under a Creative Commons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensee.

  • Web Media: Vimeo.com: Joachim K. Rennstich’s “International Financial System” Video Lecture Link: Vimeo.com: Joachim K. Rennstich’s “International Financial System”Video Lecture (Adobe Flash)
     
    Instructions: This video addresses the subjects in subunits 5.2.1-5.2.6.  When you click on the link above, you will be directed to Joachim K. Rennstich’s video lecture on “International Financial System”.  Please watch the video (approximately 1 hour and 11 minutes) in its entirety.
     
    Note on the Media: Lecturer, Joachim K. Rennstich, is an Assistant Professor for the Political Science Department at Fordham University.
     
    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

5.2.1 Intervention in the Foreign Exchange Market   5.2.2 Balance of Payments   5.2.3 Evolution of the International Financial System   5.2.4 Capital Controls   5.2.5 The Role of the IMF (International Monetary Fund)   5.2.6 International Considerations and Monetary Policy   - Assessment: Pearson Education: Frederic S. Mishkin’s “Chapter 21: The International Financial System”: “Multiple Choice Quiz” Link: Pearson Education: Frederic S. Mishkin’s “Chapter 21: The International Financial System”: “Multiple Choice Quiz” (HTML)
 
Instructions: This quiz will assess what you have learned in sections 5.2.1-5.2.6.  When you click on the link above, you will be directed to Frederic S. Mishkin’s multiple choice quiz on “Chapter 21: The International Financial System.”  After you finish the 15 questions of the quiz, please click “Submit Answers for Grading” to redirect to the answer key.
 
Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

5.3 Monetary Policy Strategy: The International Experience   Note: In this section, students discover that central banks in countries other than the United States have had remarkable success in conducting monetary policy, bringing inflation down to low levels, and promoting stable financial environments that promote general economic health.

  • Reading: Eastern Mennonite University’s version of Frederic S. Mishkin’s “Chapter 20: Monetary Policy Strategy: The International Experience” Lecture Notes Link: Eastern Mennonite University’s version of Frederic S. Mishkin’s “Chapter 20: Monetary Policy Strategy: The International Experience”Lecture Notes (Microsoft PowerPoint)
     
    Instructions: Please note these lecture slides will cover sections 5.3.1-5.3.5.  When you click on the link above, you will be directed to a course webpage for Eastern Mennonite University.  At the bottom of the webpage is a list of Frederic S. Mishkin’s lecture notes.  Please click on the PPT icon for Chapter 20 to download the entire lecture notes as a PPT file, and then please read Chapter 20 in its entirety.
     
    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

  • Reading: Pearson Education Canada’s version of Frederic S. Mishkin’s Economics of Money, Banking, and Financial Markets: “Chapter 21: Monetary Policy Strategy: The International Experience” Link: Pearson Education Canada’s version of Frederic S. Mishkin’s Economics of Money, Banking, and Financial Markets:Chapter 21: Monetary Policy Strategy: The International Experience” (PDF)
     
    Instructions: When you click on the link above, you will be directed to a webpage that lists links to lecture notes on specific chapters from Mishkin's The Economics of Money, Banking, and Financial Markets.  Click on the "Chapter 21" link to download the presentation. Please read all of the slides for Chapter 21 for information that covers sections 5.3.1-5.3.5. 

      
    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

  • Web Media: YouTube: European Central Bank’s “2of 3 Monetary Policy Strategy” Link: European Central Bank’s “2 of 3 Monetary Policy Strategy” (YouTube)
     
    Instructions: This video will address the topics in sections 5.3.1-5.3.5.  When you click on the link above, you will be directed to European Central Bank’s “2of 3 Monetary Policy Strategy” video hosted on YouTube.  Please watch the video (5:06 minutes) in its entirety.
     
    Note on the Media: This video addresses the European Central Bank’s (ECB) goal of maintaining price stability.
     
    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

5.3.1 The Role of a Nominal Anchor   5.3.2 Exchange Rate Targeting   5.3.3 Monetary Targeting   5.3.4 Inflation Targeting   5.3.5 Monetary Policy with an Implicit Nominal Anchor   Note: A nominal anchor is a variable used to establish a price level (for example, the inflation rate, an exchange rate, or the money supply) as a target for achieving a goal, such as price stability.  For example, if a monetary authority sets a nominal anchor of 0.13 percent inflation, it then uses its various tools and strategies to achieve that target.

  • Assessment: Pearson Education: Frederic S. Mishkin’s “Chapter 21: Monetary Policy Strategy: The International Experience”: “Multiple Choice Quiz” Link: Pearson Education: Frederic S. Mishkin’s “Chapter 21: Monetary Policy Strategy: The International Experience”: “Multiple Choice Quiz” (HTML)
     
    Instructions: This quiz will assess what you have learned in subunits 5.3.1-5.3.5.  When you click on the link above, you will be directed to Frederic S. Mishkin’s multiple choice quiz on “Chapter 21: Monetary Policy Strategy: The International Experience.”  After you finish the 15 questions of the quiz, please click “Submit Answers for Grading” to check your answers.
     
    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.