Logout Open In App
Open In App
Warning: foreach() argument must be of type array|object, bool given in /var/www/html/web/app/themes/studypress-core-theme/template-parts/header/mobile-offcanvas.php on line 20

Chapter 26: Problem 2

The U.S. dollar exchange rate increased from \(\$ 0.96\) Canadian in June 2011 to \(\$ 1.03\) Canadian in June \(2012,\) and it decreased from 81 Japanese yen in June 2011 to 78 yen in June 2012. What was the value of the Canadian dollar in terms of U.S. dollars in June 2011 and June \(2012 ?\) Did the Canadian dollar appreciate or depreciate against the U.S. dollar over the year June 2011 to June \(2012 ?\)

Short Answer

Expert verified
The Canadian dollar was worth approximately \(1.0417\) USD in June 2011 and \(0.9709\) USD in June 2012. It depreciated against the U.S. dollar.

Step by step solution

01

- Understand Currency Conversion

To find the value of the Canadian dollar in terms of U.S. dollars, use the exchange rate given. If the U.S. dollar is worth \(\$ 0.96\) Canadian, then the value of 1 Canadian dollar (CAD) in terms of U.S. dollars (USD) is found by taking the reciprocal.
02

- Calculate Value for June 2011

For June 2011: The exchange rate is \(\$ 0.96\) Canadian per 1 U.S. dollar. The value of 1 CAD in USD is: \[\frac{1}{0.96} \approx 1.0417 \]
03

- Calculate Value for June 2012

For June 2012: The exchange rate is \(\$ 1.03\) Canadian per 1 U.S. dollar. The value of 1 CAD in USD is: \[\frac{1}{1.03} \approx 0.9709 \]
04

- Compare Values

Compare the values calculated for June 2011 and June 2012. \(1.0417\) USD in June 2011 and \(0.9709\) USD in June 2012.
05

- Determine Appreciation or Depreciation

A decrease from \(1.0417\) USD to \(0.9709\) USD indicates that the Canadian dollar depreciated against the U.S. dollar over the year.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

Key Concepts

These are the key concepts you need to understand to accurately answer the question.

currency conversion
Currency conversion is the process of determining the equivalent value of one currency in terms of another currency. It is essential for understanding global trade and investing. When you convert currency, you need to know the exchange rate, which shows how much one currency is worth in terms of another. To convert, simply divide or multiply the amount of money by the exchange rate.
  • Example: If you have 100 Canadian dollars (CAD) and the exchange rate is 0.75 USD per CAD, you multiply: \(100 \times 0.75 = 75\) USD.
  • Another example: If the exchange rate is 1.3 USD/CAD and you want to convert 100 USD, you divide: \(100 \div 1.3 = 76.92\) CAD.
exchange rate calculation
Exchange rate calculation helps you find out how much a certain currency is worth in another currency. To find out the value of 1 unit of currency in terms of another, you often need to take the reciprocal of the given exchange rate.
For example, if the exchange rate is given as \text{USD/CAD} = 0.96, it means 1 USD = 0.96 CAD. To find out how much 1 CAD is worth in USD, you take the reciprocal, \(\frac{1}{0.96} \approx 1.0417\) USD.
  • Step-by-step: If 1 USD = 0.96 CAD, then 1 CAD = \(\frac{1}{0.96}\) USD.
  • Similarly, if the exchange rate changes to \text{USD/CAD} = 1.03, then 1 CAD = \(\frac{1}{1.03} \approx 0.9709\) USD.
depreciation and appreciation
Depreciation and appreciation describe how the value of a currency changes relative to another currency over time.

Depreciation occurs when a currency loses value compared to another currency. For instance, if 1 CAD was worth 1.0417 USD in June 2011 but drops to 0.9709 USD in June 2012, the CAD has depreciated.
Appreciation happens when a currency gains value. If the exchange rate changes from 0.97 USD/CAD to 1.03 USD/CAD, the CAD has appreciated.
  • Indicator of Depreciation: Lower value of currency in terms of another.
  • Indicator of Appreciation: Higher value of currency in terms of another.
U.S. dollar (USD)
The U.S. dollar (USD) is the official currency of the United States. It's one of the most widely used currencies in the world for international trade and finance. Changes in the value of the USD can significantly impact global markets.

When analyzing exchange rate changes involving the USD, pay attention to:
  • Global economic indicators and news.
  • Supply and demand for USD.
  • Relative performance of the U.S. economy compared to others.

For instance, a strong U.S. economy can lead to a stronger USD, whereas economic challenges could weaken it.
Canadian dollar (CAD)
The Canadian dollar (CAD) is the official currency of Canada. Its value is influenced by economic factors in Canada and the global economy.

When examining CAD in exchange rate calculations, consider the following:
  • Economic performance in Canada.
  • Commodity prices, especially oil, as Canada is a major exporter.
  • Monetary policy and interest rates set by the Bank of Canada.

For example, in the exercise, we see changes in the exchange rate of CAD against the USD between 2011 and 2012, which indicates economic and market fluctuations.
foreign exchange market
The foreign exchange market (Forex or FX) is where currencies are traded globally. It is the largest and most liquid financial market in the world.
  • Traders include banks, corporations, governments, and individual investors.
  • Currency prices are determined by supply and demand factors.
  • Market operates 24 hours a day, five days a week.

In this market, exchange rates can fluctuate rapidly due to various factors like economic data, geopolitical events, and market sentiment. Traders use these fluctuations to buy and sell currencies, aiming to profit from changes in exchange rates.

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

U.S. Declines to Cite China as Currency Manipulator In \(2007,\) the U.S. trade deficit with China hit an alltime high of \(\$ 256.3\) billion, the largest deficit ever recorded with a single country. Chinese currency, the yuan, has risen in value by 18.4 percent against the U.S. dollar since the Chinese government loosened its currency system in July \(2005 .\) However, U.S. manufacturers contend the yuan is still undervalued by as much as 40 percent, making Chinese goods more competitive in this country and U.S. goods more expensive in China. China buys U.S. dollardenominated securities to maintain the value of the yuan in terms of the U.S. dollar. Source: MSN, May 15,2008. What was the exchange rate policy adopted by China after July \(2005 ?\) Explain how it works.

With the strengthening of the yen against the U.S. dollar in 2012 , Japan's central bank did not take any action. A Japanese politician called on the central bank to take actions to weaken the yen, saying it will help exporters in the short run and have no long-run effects. a. What is Japan's current exchange rate policy? b. What does the politician want the exchange rate policy to be in the short run? Why would such a policy have no effect on the exchange rate in the long run?

U.S. Declines to Cite China as Currency Manipulator In \(2007,\) the U.S. trade deficit with China hit an alltime high of \(\$ 256.3\) billion, the largest deficit ever recorded with a single country. Chinese currency, the yuan, has risen in value by 18.4 percent against the U.S. dollar since the Chinese government loosened its currency system in July \(2005 .\) However, U.S. manufacturers contend the yuan is still undervalued by as much as 40 percent, making Chinese goods more competitive in this country and U.S. goods more expensive in China. China buys U.S. dollardenominated securities to maintain the value of the yuan in terms of the U.S. dollar. Source: MSN, May 15,2008. What was the exchange rate policy adopted by China until July 2005 ? Explain how it worked. Draw a graph to illustrate your answer.

The U.S. price level is \(115,\) the Japanese price level is \(92,\) and the real exchange rate is 98.75 Japanese real GDP per unit of U.S. real GDP. What is the nominal exchange rate?

Indian Entrepreneur Seeks Opportunities Rahul Reddy, an Indian real estate entrepreneur, believes that "The United States is good for speculative higher- risk investments." He profited from earlier investment in Australia and a strong Australian dollar provided him with the funds to enter the U.S. real estate market at prices that he believed "we will probably not see for a long time." He said, "The United States is an economic powerhouse that I think will recover, and if the exchange rate goes back to what it was a few years ago, we will benefit."Based on an article in Forbes, July 10,2008 Explain why Mr. Reddy is investing in the U.S. real estate market.
See all solutions

Recommended explanations on Economics Textbooks

Taxation Economics

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free