Dollarization in Ecuador
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Questions and Answers

What is the formula to find the change in Home's effective exchange rate?

  • Δ𝐸𝐸effective = Δ𝐸𝐸1 / Trade1 + Δ𝐸𝐸2 / Trade2 + … + Δ𝐸𝐸𝑁𝑁 / Trade𝑁𝑁
  • Δ𝐸𝐸effective = Δ𝐸𝐸1 Trade1 + Δ𝐸𝐸2 Trade2 + … + Δ𝐸𝐸𝑁𝑁 Trade𝑁𝑁 (correct)
  • Δ𝐸𝐸effective = Δ𝐸𝐸1 Trade1
  • Δ𝐸𝐸effective = Δ𝐸𝐸1 + Δ𝐸𝐸2 + … + Δ𝐸𝐸𝑁𝑁
  • What does Home's effective exchange rate change by when (-10% × 40%) + (30% × 60%)?

  • +4%
  • -4%
  • -14%
  • +14% (correct)
  • What is the percentage change in the value of the U.S. dollar against a basket of 7 major currencies by early 2008?

  • 35% (correct)
  • 30%
  • 40%
  • 25%
  • Why did the dollar lose less value against a broad basket of 26 currencies compared to a basket of 7 major currencies?

    <p>The broad basket included important U.S. trading partners that maintained fixed or tightly managed exchange rates against the dollar.</p> Signup and view all the answers

    What is the term for a system in which the exchange rate is fixed, but is allowed to fluctuate within a narrow band?

    <p>Crawling peg</p> Signup and view all the answers

    What is the term for a system in which a country adopts the currency of another country as its own official currency?

    <p>Dollarization</p> Signup and view all the answers

    What is the term for the exchange rate of one currency in terms of another?

    <p>Bilateral nominal exchange rate</p> Signup and view all the answers

    What is the term for the exchange rate that takes into account the currencies of multiple countries?

    <p>Effective exchange rate</p> Signup and view all the answers

    What is the formula to find the change in the home country's effective exchange rate when there are N currencies in the basket?

    <p>Δ𝐸𝐸effective = Δ𝐸𝐸1 Trade1 + Δ𝐸𝐸2 Trade2 + … + Δ𝐸𝐸𝑁𝑁 Trade𝑁𝑁</p> Signup and view all the answers

    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.

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