ECON 1101 Winter 2023 Exchange Rates 1. Why do countries demand foreign currency (a) (b) (c) 2. Why trade (a) Benefits 1. IV. V. (b) Downsides 1. H. Iv. 3. Calculate exchange rates (a) 1 CAD - GAP 1 GEP - CAD (b) 1 CAD - EURO 1 EURO - CAD (c) 1 CAD - USD 1 USD - CAD 4. History of Canadian exchange rates (a) the Gold Standard was a exchange rate (b) the Bretton Woods Agreement created a exchange rate (c) Canada currently has a 15. Pegged Exchange Rate (a) Benefits 1. H. (b) Downsides 1. H. (c) Maintaining the pegged exchange rate if the currency is overvalued i. Creates a i. Solutions: I. Using monetary policy to maintain a pegged exchange mice (d) Maintaining the pegged exchange rate if the currency is undervalued i. Creates a H. Solutions: 2li. Using monetary policy to maintain a pegged exchange rate: 6. Managed float (a) Exchange rates are determined by (b) Purchasing power parity: (c) Arbitrage causes purchasing power to i. Definition: ii. How arbitrage works: (d) Using the Big Mac Index to determine if currency is over or undervalued i. Example 1