Money, Banking, and International FinanceStep 2: Trader converts the euros into Croatian kunas, shown below:, 25 , 000 , 000 kunas
€ 1kuna100
250 , 000 € =
Step 3: Trader converts the kunas back into Bosnian convertible marks, calculated below.
Consequently, the trader earns 43,478.26 km in profits.
543,478.26km
kunas 461 km
25 , 000 , 000 kunas =
- Supply for U.S. dollars comes from people holding U.S. dollars, and they trade those dollars
for another currency. A demand for currency in one market automatically creates a supply of
currency in another market as people exchange currencies. Finally, a central bank could
expand the supply of U.S. dollars. - Americans buy fewer Mexican made goods. Thus, the demand for pesos falls and shifts
leftward. Consequently, the peso depreciates while the U.S. dollar appreciates, causing
Mexican imports to decrease while exports increase. - The Federal Reserve must reduce the supply of U.S. dollars. It can trade euros for U.S.
dollars, causing the U.S. dollar to appreciate and the euro to depreciate. However, the
European Central Bank can nullify this by purchasing the supply of euros with U.S. dollars.
Hence, the Federal Reserve bought U.S. dollars off the currency exchange markets while the
European Central Bank injects new U.S. dollars in their place. - Foreign investors reduce their demand for U.S. currency, shifting the demand function
leftward. Furthermore, U.S. investors invest in other countries for a higher interest rate. As
they convert their U.S. dollars into another currency, the supply function for U.S. dollars
increases. Consequently, the U.S. dollar depreciates while the market quantity of U.S.
dollars becomes ambiguous. - Lower demand for the Uzbek som causes the som to depreciate against the U.S. dollar. The
Uzbek central must reduce its som on the currency exchange markets by purchasing som
with its official reserves. Supply for som decreases and shifts leftward, returning the som to
the original exchange rate. - Japan has a low risk of capital flight. Most of the Japanese debt is held internally, and
international investors have few investments in Japan. Consequently, if the Japanese
government defaulted on its debt, the crisis would most likely remain inside of Japan.