Currency markets and their effects on the U.S. economy Essay

Currency market places and their effects on the U.S. economy - Essay ExampleThis paper discusses up-to-dateness markets, how they operate, and how they affect the economy of the United States. The specific cases of two external currencies - the Euro and the Japanese yearn - and the impact of their movements on the U.S. economy are analyzed to provide a clearer picture that would facilitate the sagaciousness of the theory.Although the term currency is equivalent with funds that is a strength of economic exchange, what would be discussed in this paper is the currency market, not the money market. The reasons for this distinction will be explained below.A currency market, alike(p) any other market, is a place where currencies are bought and sold. This is different from a money market, which is where monetary or financial instruments such as bonds, stocks, derivatives, insurance policies, interchangeable funds and similar goods are transacted. However, currency and money market s share four key elements that each(prenominal)ow transactions in any market to take place.First, the market should exist either physically in a building as the New York Stock Exchange, the Chicago Mercantile Exchange for commodities, or a part flea market, or virtually in a computer placement which is the case for most markets where bonds, derivatives, or currencies are bought and sold. In the currency market, there is no angiotensin converting enzyme location where currencies are traded. Instead, there are many trades taking place, in banks, moneychangers, shops, even hotels, and each venue has a set of exchange rates for defile and sell bids, with the latter usually higher by a fraction. These rates are the prices that the agent is willing to pay for (buy) or get paid for (sell) in transacting each currency. Then, there should be goods that are exchanged in this market buyers and sellers who either buy or sell the goods and money that is used as the medium of exchange. A mar ket transaction is therefore where buyers acquire from sellers certain goods in exchange for money at an agreed price.The main difference between all the other types of markets such as money markets and a currency market is that in a currency market, the goods bought and sold are currencies and the payments are also make in currencies that are denominated differently from that which is sold or bought. Therefore, in a currency market, someone or an entity that wants to buy U.S. dollars can buy it using Euros (denomination of the Eurozone currency), Yen (Japan), Pounds Sterling (United Kingdom), and so on.This brings an important question to mind how much is a U.S. dollar worth, and if what it is worth determines the price that others are going to pay for it, why is the currency of the U.S. not the same as the currency of other countries What determines the price of currencies in the market The answers to these questions depend on an understanding of what is called the monetary system , or the way the money supply is determined in each country and, therefore, in the whole world. Knowing how the monetary system operates will give a better understanding of how currency prices are determined in the currency market.Monetary SystemA clear understanding of the worlds monetary system will explain how a currency is valued, how its value compares with other currencies defined by the exchange rate, the roles that exchange rates play in the world economy, and how exchange rates are determined. Solomon (in Samuelson and Nordhaus) set forth the monetary system as followsThe worlds monetary system is like the traffic lights in a city, taken for granted until it begins to malfunction and to disrupt peoples livesA well-functioning monetary system will facilitate international trade and investment and smooth adaptation to change. A monetary system that functions poorly may not only disapprove the development of trade and investment among nations but subject their economies to d isruptive shocks when necessary adjustments are prevented or delayed (1, 7)