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What is the formula to find the change in Home's effective exchange rate?
What is the formula to find the change in Home's effective exchange rate?
What does Home's effective exchange rate change by when (-10% × 40%) + (30% × 60%)?
What does Home's effective exchange rate change by when (-10% × 40%) + (30% × 60%)?
What is the percentage change in the value of the U.S. dollar against a basket of 7 major currencies by early 2008?
What is the percentage change in the value of the U.S. dollar against a basket of 7 major currencies by early 2008?
Why did the dollar lose less value against a broad basket of 26 currencies compared to a basket of 7 major currencies?
Why did the dollar lose less value against a broad basket of 26 currencies compared to a basket of 7 major currencies?
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What is the term for a system in which the exchange rate is fixed, but is allowed to fluctuate within a narrow band?
What is the term for a system in which the exchange rate is fixed, but is allowed to fluctuate within a narrow band?
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What is the term for a system in which a country adopts the currency of another country as its own official currency?
What is the term for a system in which a country adopts the currency of another country as its own official currency?
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What is the term for the exchange rate of one currency in terms of another?
What is the term for the exchange rate of one currency in terms of another?
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What is the term for the exchange rate that takes into account the currencies of multiple countries?
What is the term for the exchange rate that takes into account the currencies of multiple countries?
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What is the formula to find the change in the home country's effective exchange rate when there are N currencies in the basket?
What is the formula to find the change in the home country's effective exchange rate when there are N currencies in the basket?
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Study Notes
Dollarization
- Dollarization occurred in Ecuador in 2000, where a country unilaterally adopts the currency of another country.
Foreign Exchange Market
- The foreign exchange market (forex or FX market) is where exchange rates are set globally.
- The forex market is not an organized exchange and trades are conducted "over the counter" and in many locations.
- In April 2019, the global forex market traded $6.6 trillion per day, which is 29% more than in 2016, over three times more than in 2004, and over six times more than in 1992.
- Major foreign exchange centers include London, New York, Singapore, and Hong Kong.
- Other important centers for forex trade include Tokyo, Zurich, Paris, and Frankfurt.
Exchange Rate Behavior
- The U.S. dollar is in a floating relationship with the yen, the pound, and the Canadian dollar.
- The U.S. dollar is subject to a great deal of volatility due to its floating regime.
- The euro was introduced in 1999 and floats against the pound and the yen.
- The Danish krone provides an example of a fixed exchange rate.
Effective Exchange Rate
- The effective exchange rate is the weighted average of bilateral nominal exchange rate changes.
- The formula to calculate the effective exchange rate is: ΔEEffective = (ΔEE1 × Trade1 + ΔEE2 × Trade2 + … + ΔEEN × TradeN) / EEffective.
- The effective exchange rate can be calculated using different baskets of foreign currencies.
Exchange Rate Examples
- The value of the U.S. dollar depreciated by 35% against a basket of 7 major currencies from 2002 to 2008.
- The value of the U.S. dollar depreciated by 25% against a broad basket of 26 currencies from 2002 to 2008.
- The dollar was floating against major currencies but was fixed or tightly managed against other currencies, such as those of China and other Asian economies.
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Description
This quiz is about Ecuador's adoption of the US dollar as its official currency in 2000, a process known as dollarization. Test your knowledge on this economic phenomenon.