Financial Markets and Institutions (2-downloads)

appreciation of the domestic currency.

Using the same reasoning, a fall in

the expected future exchange rate,

, shifts the demand curve to the left

and causes a depreciation of the currency.

Earlier in the chapter we discussed the determinants of the exchange rate in

the long run: the relative price level, relative tariffs and quotas, import and export

demand, and relative productivity (refer to Table 15.1). These four factors influ-

ence the expected future exchange rate. The theory of purchasing power parity