This is “Foreign Exchange”, chapter 18 from the book Finance, Banking, and Money (v. 2.0). For details on it (including licensing), click here.

For more information on the source of this book, or why it is available for free, please see the project's home page. You can browse or download additional books there. To download a .zip file containing this book to use offline, simply click here.

Has this book helped you? Consider passing it on:
Creative Commons supports free culture from music to education. Their licenses helped make this book available to you.
DonorsChoose.org helps people like you help teachers fund their classroom projects, from art supplies to books to calculators.

Chapter 18 Foreign Exchange

Chapter Objectives

By the end of this chapter, students should be able to:

  1. Define foreign exchange and explain its importance.
  2. Describe the market for foreign exchange.
  3. Explain why countries shouldn’t be proud that it takes many units of foreign currencies to purchase a single unit of their currency.
  4. Define purchasing power parity and explain its importance.
  5. List and explain the long-run determinants of exchange rates.
  6. List and explain the short-run determinants of exchange rates.
  7. Define the interest parity condition and explain when and why it holds.