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Finding Market Exchange Rates

Reading an exchange rate, conversion spreads, calculate your requirements, the bottom line.

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How to Calculate an Exchange Rate

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

An exchange rate is how much it costs to exchange one currency for another. Exchange rates fluctuate constantly throughout the week as currencies are actively traded. This pushes the price up and down, similar to other assets such as gold or stocks.

The market price of a currency—how many U.S. dollars it takes to buy a Canadian dollar for example—is different than the rate you will receive from your bank when you exchange currency. It is often a key element of financial trilemmas .

Here's how exchange rates work, and how to figure out if you are getting a good deal.

Key Takeaways

• An exchange rate determines the cost to buy one currency with another.
• The forex market price is different from the rate you receive when buying a foreign currency at your bank.
• Your bank marks up the market price as compensation for its currency exchange service.
• You can shop around for the most attractive exchange rate available.
• Currency exchange rates change throughout the day.

Traders and institutions buy and sell currencies 24 hours a day during the week . For a trade to occur, one currency must be exchanged for another. To buy British Pounds ( GBP ), another currency must be used to buy it. Whatever currency is used will create a currency pair . If U.S. dollars ( USD ) are used to buy GBP , the exchange rate is for the GBP/USD pair. Access to these forex (foreign exchange) markets can be found through any of the major forex brokers .

If the USD/CAD currency pair is 1.33, that means it costs 1.33 Canadian dollars to get 1 U.S. dollar. In USD/CAD , the first currency listed (USD) always stands for one unit of that currency; the exchange rate shows how much of the second currency (CAD) is needed to purchase that one unit of the first (USD).

This rate tells you how much it costs to buy one U.S. dollar using Canadian dollars. To find out how much it costs to buy one Canadian dollar using U.S. dollars, use the following formula: 1/exchange rate:

1 / 1.33 = 0.7518

It costs 0.7518 U.S. dollars to buy one Canadian dollar. This price would be reflected by the CAD/USD pair. In this instance, the position of the currencies has switched.

Some of the most popular currencies that trade against the U.S. dollar are the Euro ( EUR/USD ), the Japanese Yen ( USD/JPY ), the British Pound ( GBP/USD ), the Swiss Franc ( USD/CHF ), the Australian Dollar ( USD/AUD ), the New Zealand Dollar ( USD/NZD ), and the Canadian dollar ( USD/CAD ).

The ordering in each set of parentheses for these exchange pairs reflects the customary direct quote scheme for each pairing.

When you go to the bank to convert currencies, you most likely won't get the market price that traders get. The bank or currency exchange house will markup the price so they make a profit. Credit cards and payment service providers such as PayPal will also do this when converting currencies.

If the USD/CAD price is 1.33, the market is saying it costs 1.33 Canadian dollars to buy 1 U.S. dollar. At the bank though, it may cost 1.37 Canadian dollars. The difference between the market exchange rate and the exchange rate they charge is the bank's profit. To calculate the percentage discrepancy, take the difference between the two exchange rates, and divide it by the market exchange rate:

((1.37 - 1.33)/1.33)*100 = 3% markup

A markup will also be present if converting U.S. dollars to Canadian dollars. If the CAD/USD exchange rate is 0.75 (see the section above), then the bank may charge 0.7725. They are charging you more U.S. dollars than the market rate:

((0.7725 - 0.75)/0.75)*100 = 3% markup

Banks and currency exchanges compensate themselves for this service. The bank gives you cash, whereas traders in the market do not deal in cash. In order to get cash, wire fees and processing or withdrawal fees would be applied to a  forex account in case the investor needs the money physically.

In most cases, someone converting currencies wants to get the cash instantly and with as few fees as possible. Paying a markup to a bank or credit card company is a worthwhile compromise.

If you are converting one currency to another, shop around for an exchange rate that is closer to the market exchange rate; it can save you money. Some banks have ATM network alliances worldwide, offering customers a more favorable exchange rate when they withdraw funds from allied banks. 

Need a foreign currency? Use exchange rates to determine how much foreign currency you want, and how much of your local currency you'll need to buy it.

If heading to Europe you'll need euros ( EUR ), and will need to check the EUR/USD exchange rate at your bank. The market rate may be 1.113, but an exchange might charge you 1.146 or more. 

Assume you have $1,000 USD to buy Euros with. Divide $1,000 by 1.146 (what a bank may charge) to get 872.60 euros. That is how many Euros you get for your $1,000. Since Euros are more expensive, we know we have to divide, so that we end up with fewer units of EUR than units of USD.

Now assume you want 1,500 euros, and want to know what it costs in USD. Multiply 1,500 by 1.146 to get 1,719 USD. Since we know Euros are more expensive, one euro will cost more than one US dollar, that is why we multiply in this case.

Do You Multiply or Divide to Convert Currency?

To convert from a base currency, you would multiply by the exchange rate. If the exchange rate is greater than 1, you will get a larger number—that is, you will get more of the second currency in exchange for the first. If the exchange rate is smaller than one, you will get a smaller number, which means you get less of the second currency in exchange for the first.

Do Exchange Rates Stay the Same?

Currency exchange rates change multiple times a day based on how they are being traded, which is in turn impacted by the global economy. If there is a high demand for a certain currency, its value will increase.

What Is Forex?

Forex stands for foreign exchange . It is the market for trading international currencies. Similar to how stock traders buy and sell stocks based on how they expect the values to go up or down, forex traders exchange large amounts of one currency for another based on which they think will have the highest value due to global conditions.

Exchange rates always apply to the cost of one currency relative to another. The order in which the pair are listed matters. Remember the first currency is always equal to one unit and the second currency is how much of that second currency it takes to buy one unit of the first currency. From there you can calculate your conversion requirements.

Banks will markup the price of currencies to compensate themselves for the service. Shopping around may save you some money as some companies will have a smaller markup, relative to the market exchange rate, than others.

Bank for International Settlements (BIS). " Triennial Central Bank Survey Foreign Exchange Turnover in April 2019 Monetary and Economic Department ," Pages 5 and 10.

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Exchange Rates

Here we will learn about how to work out exchange rates, including how to convert between British pounds and foreign currencies and read conversion graphs.

There are also how to work out exchange rate worksheets based on Edexcel, AQA and OCR exam questions, along with further guidance on where to go next if you’re still stuck.

What is an exchange rate?

An exchange rate is the rate at which the money of one country can be exchanged for the money of another country. It can also be referred to as a foreign exchange rate and be seen as the price of one currency expressed in terms of another currency.

In the United Kingdom our currency is the British pound or pound sterling . The exchange rate tells us the value of £1 in terms of a foreign country’s currency. Different countries have different currencies.

For example,

The exchange rates are constantly changing depending on the country’s economic status. It is the role of the central bank to monitor these fluctuations and adjust the country’s monetary policy accordingly.

Using the exchange rate we can convert between pounds and foreign currencies. To do this we need to either multiply or divide the quantity we are trying to convert with the exchange rate.

To convert from British pounds to a foreign currency you must multiply by the exchange rate.

So £150 would be \$276 because 150 \times 1.87=276.

To convert from a foreign currency into British pounds you must divide by the exchange rate.

So, \$430 would be £229.95 because 430 \div 1.87=229.95 (to 2 dp).

A GCSE Mathematics question may ask you to convert between other currencies. It will normally give the exchange rate in a form similar to a 1:n ratio.

Dollars to Euros

To convert from the currency given as “1” we would multiply by the exchange rate.

To convert to the currency given as “1” we would divide by the exchange rate.

How to work out exchange rates

In order to convert currencies using exchange rates:

Write down the exchange rate and the other information given. Keep the same currencies in line.

Highlight the rate.

• Decide whether to multiply or divide by the rate . If you are going from the “1” to the other currency then multiply. If you are going to the “1” from the other currency then divide .

Multiply or divide the given currency by the exchange rate.

State your final answer with the correct currency symbol.

Explain how to work out exchange rates

How to work out exchange rates worksheet

Get your free how to work out exchange rates worksheet of 20+ questions and answers. Includes reasoning and applied questions.

How to work out exchange rates examples

Example 1: converting from pounds to a foreign currency.

Given the exchange rate between pound and Australian dollars is £1 = \$1.87 , convert £70 to Australian dollars.

In the question we are given,

*Make sure to line up the £1 and £70 as they are the same currency.

2 Highlight the rate.

*This tells us that every £1 is equal to \$1.87.

3 Decide whether to multiply or divide by the rate.

If you are going from the “1” to the other currency then multiply .

If you are going to the “1” from the other currency then divide .

In this case we are going from pounds to Australian dollars so we need to multiply.

4 Multiply or divide the given currency by the exchange rate.

Based on Step 3 , we need to multiply £70 by the rate which is \$1.87.

5 State your final answer with the correct currency symbol.

Example 2: converting from a foreign currency into pounds

Sally just came back from a visit to the Philippines. In her purse she still had ₱135 (peso) which she wanted to convert back into pounds. A quick check on her foreign exchange app told her the current exchange rate was £1 = ₱69. How many pounds will she get?

\begin{aligned} £1 = \ &₱69 \\\\ &₱135^* \end{aligned}

*Make sure to line up the £1 and ₱135 as they are the same currency.

*This tells us that every £1 is equal to ₱69.

Decide whether to multiply or divide by the rate.

If you are going from the “1” to the other currency then multiply.

In this case we are going from pesos to pound sterling so we need to divide.

Based on Step 3 , we need to divide ₱135 by the rate which is ₱69.

135 \div 69=1.9565...

Example 3: comparing different currencies

In the USA a computer costs \$790. The same mobile phone costs £575 in the UK. Given that the current exchange rate is £1 = 1.35 \ USD, where is the mobile phone cheaper?

£1 = \$1.35 \ USD

We are also asked to compare £575 and \$790. To compare them, we must convert them to the same currency. In this case, we can choose to either convert £575 into US dollars or \$790 into great British pounds (GBP).  

For the purposes of this question, we will convert £575 to American dollars.

\begin{aligned} & £1 = \$1.35 \\\\ &£575^* \end{aligned}

*Make sure to line up the £1 and £575 as they are the same currency.

*This tells us that every £1 is equal to \$1.35.

In this case we are going from American dollars to British pounds so we need to multiply.

Based on Step 3 , we need to multiply \$575 by the rate which is \$1.35.

575 \times 1.35=776.25

The computer costs \$776.25 in England and \$790 in the United States.

Therefore, it is cheaper to buy the computer in the UK.

Example 4: worded question

Bonnie is flying home from Spain. She buys some food and drink on the plane.

Bonnie buys 2 chocolate bars, 2 pretzels and a bottle of water. The exchange rate is £1 = €1.17 (euros). She decided to use her leftover euros from her holiday to pay for her bill. Work out the cost of her bill in euros.

£1 = €1.17 \ euros

We are also told that Bonnie buys 2 chocolate bars, 2 pretzels and a bottle of water.

We need to add together the cost of these items.

Total cost = 2 chocolate bars + \ 2 pretzels + \ 1 bottle of water

\begin{aligned} &=(2 \times 1.75)+(2 \times 1.50)+3.70 \\\\ &=£10.20 \end{aligned}

Since this total is in pounds we can put it under the pounds side of the exchange rate.

\begin{aligned} &£1 = €1.17 \\\\ &£10.20 \end{aligned}

*This tells us that every £1 is equal to €1.17.

In this case we are going from pound sterling to euros so we need to multiply.

Based on Step 3 , we need to multiply £10.20 by the rate which is €1.17.

10.20 \times 1.17=11.93

The total cost of her bill in euros is \colorbox{yellow}{$ €11.93.$}

Example 5: worded question

Samantha is planning a holiday to Turkey.

She needs to exchange some of her British pounds into Turkish lira.

The bank only stock ₺100 notes.

Samantha only wants to exchange up to £550 into Turkish lira.

She wants to get as many ₺100 notes as possible.

The current exchange rate is £1=₺12.81.

How many ₺100 notes should she get?

\begin{aligned} &£1=₺12.81 \\\\ &£550^* \end{aligned}

*Make sure to line up the £1 and £550 as they are the same currency.

*This tells us that every £1 is equal to ₺12.81.

In this case we are going from pounds to Turkish lira so we need to multiply.

Based on Step 3 , we need to multiply £550 by the rate which is ₺12.81.

550 \times 12.81=6655

Samantha would get ₺6655 if she converted £550. The bank only stock ₺100 notes so we need to divide ₺6655 by 100 to see how many notes she would get.

This would give us ₺66.55. Since you cannot get 0.55 of a note, this value can be rounded to 66.

She would get \colorbox{yellow}{$\bf{66 \ ₺100} $} notes.

Example 6: conversion graphs

Use the graph below to answer the following questions.

a) Change \$30 USD to pounds.

b) Change £65 to US dollars.

c) Change £100 to US dollars.

a Change \bf{\$30} USD to pounds .

Draw a line going up from \$30 until you hit the line, then look across to the vertical axis and read the value.

In this case \$30 = £20.

b Change \bf{£65} to US dollars .

Draw a line going across £65 until you hit the line, then look down to the horizontal axis and read the value.

In this case £65 = \$96 USD.

c Change \bf{£100} to US dollars.

Since the graph does not extend to £100, we need to use the values that we know and use them to calculate how many USD £100 is equal to.

Draw a line going across from \$50 USD to the line and down to \$74.

Since we know that

£50 = \$74 .

If we multiply both sides by 2 we get

£100 = \$148 USD.

Step-by-step guide: Conversion graphs

Common misconceptions

• Multiply or divide by the exchange rate

Pupils may get confused whether they need to multiply or divide by the exchange rate. Remember, If you are going from the “1” to the other currency then multiply. If you are going to the “1” from the other currency then divide .

• Lining up the same currencies together

When given information in the question be careful to check what currency the values are in and line up accordingly. If you mix up the currencies it will be difficult to know whether to multiply or divide by the exchange rate.

When rounding, it is usual that we need to round to 2 decimal places. For example, if calculating British pounds we get 231.7851, the final answer would be £217.79. The 2 decimal places would be the pence. 

Practice how to work out exchange rates questions

1. Given the exchange rate between British pounds and New Zealand dollars is £1 = \$1.95, convert £90 to New Zealand dollars.

Multiply £90 by the exchange rate 1.95.

This would be £175.70 .

2. Given the exchange rate between British pounds and the Indian rupee is £1 = ₹103.10, convert ₹5000 to pound sterling.

Divide ₹5000 by the exchange rate 103.10.

This would be £48.50 to the nearest pence.

3. In China an iPad costs ¥2500 (Chinese Yuan). The same iPad costs £300 in the UK. Given that the current exchange rate is £1 = ¥8.85, where is the iPad cheaper?

The UK by ¥155

China by ¥2200

China by ¥155

The price is the same in both countries

Convert £300 into Chinese Yuan by multiplying by 8.85.

This would be more expensive than the price in China by ¥155.

4. Lucy is buying some items from an online shop which will accept payments in Pounds and Euros.

She buys:   a watch costing £150

a pendant costing £280

a frame costing £17

The exchange rate is £1 = €1.27. Work out the cost of her bill in Euros.

Add up the prices.

Multiply the total by the exchange rate 1.27.

This gives €567.69 .

5. Sangita is planning a holiday to Thailand.

She needs to exchange some of her British pounds into Thai Bahts.

The bank only stock ฿1000 notes.

Sangita only wants to exchange up to £100 into Thai baht.

She wants to get as many ฿1000 notes as possible.

The current exchange rate is £1=฿45.95.

How many ฿1000 notes should she get?

Multiply =£100 by 45.95, then divide by 1000 to determine how many notes she should get.

This gives ฿4595.

We then need to work out the number of ฿1000 notes.

So Sangits would be able to get 4 \ ฿1000 notes.

How to work out exchange rates GCSE questions

1. Samantha goes on holiday to Japan.

She exchanged £850 into Japanese yen.

The exchange rate was £1 = JP¥156.88 .

(a) Change £850 into Japanese yen.

(b) When she returned she had JP¥180 left which she wanted to exchange back into pounds.

She checked the currency exchange rates app on her phone and found that the new rate was £1 = JP¥157.22.

Change JP¥180 into British pounds.

(a) 850 \times 156.88

(b) 180 \div 157.22

2. (a) On a flight back to London from Hong Kong, Jackie purchased the following items from the in-flight dining options.

• A blueberry muffin costing £2.50
• A diet coke costing £3.50
• A tuna sandwich costing £5.50

She paid part of the bill with the HK\$60 left from her holiday and paid the rest in British pounds.

The exchange rate between the British pound and the Hong Kong dollar is £1= HK\$10.68.

How much does Jackie pay in British pounds?

(b) When paying the bill Jackie realised that there was a 10\% service charge on her bill.

What was her total bill in Hong Kong dollars (HKD)? Give your answer to the nearest Hong Kong dollar.

(a)   2.50+3.50+5.50=£11.50

(b)   11.50 \times 1.10=£12.65

3. Paula goes on holiday to Canada.

She exchanged £550 into Canadian dollars.

The exchange rate was £1 = \$1.70 .

(a) Change £550 into Canadian dollars.

(b) While in Canada Paula noticed a blazer she really liked. The blazer cost \$132 \ CDN. She had seen the exact same blazer in England for £79.

Using the same exchange rate as (a), determine where the blazer is cheaper and by how much.

The blazer is cheaper in Canada by \$2.30 .

Alternatively

The blazer is cheaper in Canada by £1.35 .

Learning checklist

You have now learned how to:

• Convert between related units (prices, currencies) in numerical contexts
• Interpret graphs that illustrate direct proportion, such as currencies

The next lessons are

• Units of measurement
• Rate of change

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We've now studied ratios and proportions, and we've seen that proportions give us a way to solve problems involving ratios. We turn now to a specific type of ratio, called a rate , and investigate some interesting applications of rates.

In this section, you will learn to:

• Recognize and compute rates and unit rates in context
• Use currency exchange rates to calculate the relative values of different types of currency
• Calculate cost per unit in context, and use cost per unit to determine which of two purchasing options is a better deal

Introduction to Rates

We'll start with a simple example that might be relevant to your daily life.

Example \(\PageIndex{1}\)

Let's say that your favorite brand of shampoo is Herbal Essences. Bi-Mart sells \(11.7\) ounces of this shampoo for \(\$5.39\). On the other hand, you can get \(29.2\) ounces of this shampoo for \(\$7.97\) on Amazon . What shampoo would give you the better deal?

Sure, the \(29.2\) ounce shampoo in the above example is more expensive than the \(11.7\) ounce bottle, but does that mean that the more expensive option gives you less value? How can you compare these two quantities when they have different prices and different volumes? Rates can help us answer this question.

Definition: Rate

A rate is a ratio in which the units of the two quantities being compared are different.

In fact, many of the ratios we have seen already are rates. For example, when we computed our hourly pay, we were actually finding a rate, because we compared dollars to hours worked. Other examples of rates include:

• Miles per gallon
• Rotations per minute
• Kilometers per hour

Do you see a pattern with all of these rates? They all have one word in common: the word per . This word, which is often ignored, means "for each" or "for every one" in this context. If you see the word "per" between two units, there's a good chance you are dealing with a rate.

In fact, most of the rates we see in our every day lives are a particular type of rate.

Definition: Unit Rate

A unit rate is a rate expressed so that the denominator of the corresponding ratio is \(1\). (Recall that the "denominator" is the bottom number of the ratio when it is expressed in fraction form.) 

Think about the "miles per gallon" example above. If we hear, "this car gets 30 miles per gallon," we know that for every 30 miles driven, the car uses 1 gallon of gas. The number 1 is implicit in the way we express most rates. Even if we are given a rate that is not a unit rate, we can convert it to a unit rate using proportions, as in the example below.

Example \(\PageIndex{2}\)

Which of the following are unit rates? For those that are not, convert them to unit rates

• \(5\) miles per hour
• \(7\) feet every \(2\) seconds
• The expression "\(5\) miles per hour" is already a unit rate, since it means "5 miles for every one hour." We can express this ratio in the following way: \[\frac{5 \text{ miles}}{1 \text{ hour}}\] The denominator of this fraction is \(1\), so this is a unit rate.
• The expression "\(7\) feet every 2 seconds" is not a unit rate. As a fraction, it is represented as follows: \[\frac{7 \text{ feet}}{2 \text{ seconds}}\] The fraction above does not have a \(1\) in the denominator, so it is not a unit rate. To convert it into a unit rate, we will set up a proportion involving the ratio above, and an equivalent ratio that does have a 1 in the denominator: \[\frac{7 \text{ feet}}{2 \text{ seconds}} = \frac{x \text{ feet}}{1 \text{ seconds}} \] \[\frac{7 \text{ feet}}{2 \text{ seconds}}\] Now we'll use Cross Multiplication and Division undoes Multiplication to solve for \(x\): \[\begin{align*} 2x &= 7 \\ x &= \frac{7}{2} \\ x & = 3.5 \end{align*} \] That means that a unit rate equivalent to "\(7\) feet every \(2\) seconds" is "\(3.5\) feet every one second." This can be rephrased as "\(3.5\) feet per second," which is more easily understood.

An alternative way to solve the second example would simply to divide \(7 \div 2 = 3.5\). The fact that these alternative ways give the same answer serves to illustrate how useful our method of solving proportions is in different contexts.

Currency Exchange Rates

We'll start by discussing a bit of background about world currencies and how they are used.

There are over \(160\) national currencies in the world. When you travel between two countries that use different currencies, it is necessary to exchange some of one type of currency for the other. This is particularly true in countries where cash is used more frequently that credit/debit cards. It's always a good idea when traveling internationally to carry a small amount of that country's currency in either coins or bills. You can get currency from other countries by ordering it through a bank ahead of your travel. You can also exchange currency at a currency exchange business in the airport, port, or border crossing when you are traveling, though these methods usually have fees associated with them and can be exploitative. In some places, ATMs can be used to dispense currency as well.

But there is a big question here: how much of the other type of currency will you get when you exchange? Most countries do not use the United States Dollar or an equivalent, so this question can be hard to answer. For example, Mexico uses Mexican Pesos as its national currency. At the time this book was written, \(1\) Mexican Peso was worth about \(6\) US cents according to a reliable currency exchange website . That doesn't meant that product cost significantly more or less in either place. The costs of items are scaled to reflect the fact that one Mexican Peso has a relatively smaller value than one US Dollar. For example, a taco plate in Mexico might cost \(90\) Mexican pesos, which is equivalent to \(15\) US Dollars. When the individual units of currency have relatively smaller value, the sticker price on the item goes up. The opposite is also true -- if a currency has a higher value, the items priced in that currency tend to have lower prices. This can be very confusing for travelers.

What's more, these exchange rates change from day to day, depending on international economic factors. At any time, it is possible to look up the exchange rate using the internet, or by going through a bank and asking what exchange rate they are using. There may even be slight discrepancies between these numbers. In this text, we'll use exchange rates that are current at the time of writing according to Google's currency exchange rate lookup feature.

Since currency exchange rates are, at their most basic mathematical level, ratios, we can use our techniques from earlier chapters to solve currency exchange problems. In this section we will avoid using the \(\$\) sign and instead write out "USD" for US Dollar amounts. This helps avoid confusion with symbols, since other countries also use the \(\$\) symbol to mean the currency of that country.

Let's look at a simple example. Please note that example values in this section may not be current as this book is only updated periodically.

Example \(\PageIndex{3}\)

Each Japanese Yen is worth \(.0093\) USD. Prior to a trip to Japan, you want to exchange \(250\) US Dollars for Yen. How many Japanese Yen will you get in this exchange? Round to the nearest whole.

We are given the exchange rate of \(1\) Japanese Yen to \(.0093\) US Dollars. Before we start, let's think for a second about this rate: it means that each Yen is equivalent to less than \(1\) US cent, because \(1\) US cent is \(.01\) US dollars, and\(.0093\) is just slightly less than \(.01\). In forming this observation, we can conclude that \(250\) USD will give us a very large amount of Yen, since each USD will be equivalent to over \(100\) Yen.

To actually solve this problem, we set up a proportion that compares Yen to USD, using \(x\) to stand for the quantity we want to find:

\[\frac{1 \text{ Yen}}{.0093 \text{ USD}} = \frac{x \text{ Yen}}{250 \text{ USD}}\]

Notice that we've got the exchange rate we are given on the left, and on the right we've got what we're trying to find. The units are labeled so that we know everything is in the correct place. Now we simply solve this proportion:

Rounding to the nearest whole, we find that we get \[26,882\] Japanese Yen. This may seem like an enormous amount, but based on our observation before starting this problem, it makes sense that the number of Yen is large.

Currency exchange rate problems can always be solved using a method similar to the one above. Depending on the information you are given, your unknown may occur in a different place, but our techniques for solving proportions allow us to find any unknown value, so long as we have all of the other information.

What's the Better Deal?

To introduce this last application of rates, we'll start with an example. Note that throughout this section, we will use the \(\$\) sign again, and all prices are assumed to be in US Dollars. The next example should look familiar to you.

Example \(\PageIndex{4}\)

Before attempting to solve this problem, let's understand what is being asked. For our purposes, we consider a choice to be the "best deal" if the cost per unit of the product is lower . In this case, the unit that is used to measure the shampoo is ounces. Therefore, this question could be rephrased as: which of these two purchasing options has the lowest cost per ounce?

In order to solve this question, we want to determine the cost per ounce of each possible purchase. In other words, we want to find the unit rate of cost for each purchase, and the lower unit rate will correspond to the better deal.

For the \(11.7\) ounce shampoo you can buy at Bi-Mart, we can calculate the cost per ounce by dividing the cost by the number of ounces:

\[\frac{\$5.39}{11.7 \text{ ounces}} \approx \$0.46 \text{ per ounce}\]

For the \(\$7.97\) ounce shampoo available on Amazon, we calculate the cost per ounce in the same way:

\[\frac{\$7.97}{29.2 \text{ ounces}} \approx \$0.27 \text{ per ounce}\]

In summary, the \(11.7\) ounce bottle costs \(\$0.46\) per ounce, and the \(29.2\) ounce bottle cost \(\$0.27\) per ounce. That means that the \(29.2\) ounce bottle is a better deal, since it costs less per ounce.

You may have approached the problem above in a different way, by noticing that if you bought two of the \(11.7\) ounce bottles, you'd only have \(23.4\) ounces of shampoo, but have paid \(2 \times \$5.39 = \$10.78\), whereas you could have paid \(\$7.97\) for more shampoo, so Amazon is a better deal. That would be a reasonable way to approach this problem, but not all situations are as easy to calculuate in your head.

These sorts of questions can get trickier if the units involved are not immediately obvious. Let's see another example.

Example \(\PageIndex{5}\)

A pizza parlor sells circular pizzas. A large pizza costs \(\$12\), and a family size pizza costs \(\$16\). A large pizza has a \(12\) inch diameter, and a family size pizza has a \(14\) inch diameter. Which pizza is the better deal?

This problem looks almost too easy at first — certainly the \(12\)-inch pizza is better because it costs a dollar per inch, and the other one costs more per inch!

But wait: what is an "inch" of pizza? That's not a relevant measurement here. The more important unit to consider, when thinking about pizza, is the number of square inches of pizza you get. The area of the pizza is what matters most, not the diameter.

Our first step will therefore be to calculate the areas of the pizza involved. In order to do that, you need to know the area of a circle. The area \(A\) of a circle with radius \(r\) is given by \[A = \pi r^2\] where \(\pi\) is a special constant number related to circles. While \(\pi\) is irrational, meaning a decimal that goes on forever without repeating, it is usually safe to use \(\pi \approx 3.14\) in calculations.

So we proceed to calculate the areas of the two pizzas. The large pizza has a \(12\) inch diameter. The diameter is twice the radius, so this pizza has a \(6\) inch radius. We can find area of the large pizza by calculating \[A_{\text{large}} = \pi r^2 = \pi \cdot (6^2) = 36 \pi \approx 113 \text{ square inches}\]

Similarly, the diameter of the family-size pizza is \(14\) inches, so its radius is \(7\) inches. Therefore, the area of the family-size pizza is given by \[A_{\text{family}} = \pi r^2 = \pi \cdot (7^2) = 49 \pi \approx 154 \text{ square inches}\]

Now that we've got the areas of both pizzas, we can ask: what is the cost per square inch of each pizza? The pizza with the lower cost per square inch will be a better deal.

We find the cost per square inch by dividing the cost of the pizza by the number of square inches. For the large pizza, the cost per square inch is \[\frac{\$12}{113 \text{ square inches}} = \$.106 \text{ per square inch}\]

For the family size pizza, the cost per square inch is \[\frac{\$16}{154 \text{ square inches}} = \$.104 \text{ per square inch}\]

Comparing these two numbers, we see that the \(\$16\) pizza, which was the \(14\) inch family size pizza, has a slightly lower cost per square inch. Therefore, the family size \(14 \)inch pizza is the better deal.

This example illustrates two things:

• It's important to think critically about the question to find the right interpretation. In this case we needed to first find the area of each pizza to make sense of the problem.
• Sometimes cost per unit amounts can be very close, and it's necessary to include many digits following the decimal point. Here it was necessary to go to the third decimal place to see which number was larger.

Keep these things in mind as you answer questions that ask: what is the better deal?

• Write down at least three other examples of rates that were not discussed in this particular chapter.
• Is 8 meters every 5 seconds a unit rate? If not, convert it to a unit rate.
• Is 6 beats per minute a unit rate? If not, convert it to a unit rate.
• Before a trip to Morocco you exchange 300 US Dollars for Moroccan Dirhams. How many Dirhams do you get?
• At the end of the trip, you have 45 Moroccan Dirhams left. If you exchange these for US Dollars, how many Dollars will you get back?
• You are told that \(1\) Swiss Franc is worth \(1.04\) US Dollars, and that \(1\) Russian Ruble is worth \(.014\) US Dollars. On a trip from Switzerland to Russia, you exchange \(50\) Swiss Francs for Russian Rubles. How many Rubles do you get? Round to the nearest whole. [Hint: you can do two separate currency exchange calculations.]
• Suppose that \(32\) ounces of soda costs \(\$1.69\), and \(54\) ounces of the same soda costs \(\$3.47\). Which is the better deal and why?
• You are purchasing land on which to build a home. There are two rectangular lots to choose from. Lot A is \(80\) feet by \(110\) feet, and costs \(\$94,000\). Lot B is \(70\) feet by \(120\) feet, and costs \(\$87,000\). Assuming that all other characteristics of the properties are equally desirable, and you are willing to accept either size lot, which is the better deal and why? [Hint: a rectangle's area is calculated by its length times its width.]

Activity: Currency Conversion

In this activity, you will learn how to convert money between different currencies using an exchange rate table and a calculator.

You will need

• a calculator (or use this calculator )
• A current list of exchange rates (look up on the internet)

The Martin family live in the US and are going to visit many different countries on their vacation.

From their home in New York they travel to Toronto (Canada), London (England), Rome (Italy), New Delhi (India), Tokyo (Japan) and Sydney (Australia), before returning home across the Pacific.

The route is shown on the following map:

Mr. Martin uses his credit card to change money from USD ($US) to the local currency in each of the locations they visit.

Because currencies change all the time, the amount of money Mr. Martin receives in each local currency will change from day to day. But the following table (old data) will give you an idea of how currencies are converted:

You will often see them quoted like "AUD/USD 0.67 16 " meaning that 1 Australian Dollar will get you 0.67 16 USD

Or "USD/JPY 137 .31" meaning that 1 USD will get you 137.31 Japanases Yen.

So which figure should you use?

• The Unit/USD figure tells us how many USD we get for 1 of the other currency.
• The USD/Unit figure tells us how much of the other currency we get per 1 US Dollar

Find today's current exchange rates. Use the internet to find them and fill them in:

Let's look at an example

Mr. Martin converts USD500 to Canadian dollars. How much does he receive?

First find the "Canadian Dollar" row.

Then, because we are converting from the US currency to the Canadian currency, we should use the USD/Unit column:

So he receives USD500 × 1.3634 = CAD681.70

How much will Mr. Martin receive if he changes

• USD1000 to British pounds?
• USD650 to Euro?
• USD400 to Indian Rupees?

Another Example

When the Martin family arrives back in the US from Australia, Mr. Martin finds that he has AUD220 left over and wants to change it back into USD. How much does he receive?

We use the "Australian Dollar" row, and because we are converting from the Australian currency to the US currency, we should use the Unit/USD column:

So he receives AUD220 × 0.67 16 = USD147.75

Mr. Martin also has some other money left over. How much will he receive in USD for:

• 3,500 Indian Rupees?

Want to create or adapt books like this? Learn more about how Pressbooks supports open publishing practices.

11.3 Monetary Policy and the Equation of Exchange

Learning objectives.

• Explain the meaning of the equation of exchange, MV = PY , and tell why it must hold true.
• Discuss the usefulness of the quantity theory of money in explaining the behavior of nominal GDP and inflation in the long run.
• Discuss why the quantity theory of money is less useful in analyzing the short run.

So far we have focused on how monetary policy affects real GDP and the price level in the short run. That is, we have examined how it can be used—however imprecisely—to close recessionary or inflationary gaps and to stabilize the price level. In this section, we will explore the relationship between money and the economy in the context of an equation that relates the money supply directly to nominal GDP. As we shall see, it also identifies circumstances in which changes in the price level are directly related to changes in the money supply.

The Equation of Exchange

We can relate the money supply to the aggregate economy by using the equation of exchange:

Equation 11.1

The equation of exchange shows that the money supply M times its velocity V equals nominal GDP. Velocity is the number of times the money supply is spent to obtain the goods and services that make up GDP during a particular time period.

To see that nominal GDP is the price level multiplied by real GDP, recall from an earlier chapter that the implicit price deflator P equals nominal GDP divided by real GDP:

Equation 11.2

Multiplying both sides by real GDP, we have

Equation 11.3

Letting Y equal real GDP, we can rewrite the equation of exchange as

Equation 11.4

We shall use the equation of exchange to see how it represents spending in a hypothetical economy that consists of 50 people, each of whom has a car. Each person has $10 in cash and no other money. The money supply of this economy is thus $500. Now suppose that the sole economic activity in this economy is car washing. Each person in the economy washes one other person’s car once a month, and the price of a car wash is $10. In one month, then, a total of 50 car washes are produced at a price of $10 each. During that month, the money supply is spent once.

Applying the equation of exchange to this economy, we have a money supply M of $500 and a velocity V of 1. Because the only good or service produced is car washing, we can measure real GDP as the number of car washes. Thus Y equals 50 car washes. The price level P is the price of a car wash: $10. The equation of exchange for a period of 1 month is

Now suppose that in the second month everyone washes someone else’s car again. Over the full two-month period, the money supply has been spent twice—the velocity over a period of two months is 2. The total output in the economy is $1,000—100 car washes have been produced over a two-month period at a price of $10 each. Inserting these values into the equation of exchange, we have

[latex]\$ 500 \times 2 = \$ 10 \times 100[/latex]

Suppose this process continues for one more month. For the three-month period, the money supply of $500 has been spent three times, for a velocity of 3. We have

[latex]\$ 500 \times 3 = \$ 10 \times 150[/latex]

The essential thing to note about the equation of exchange is that it always holds. That should come as no surprise. The left side, MV , gives the money supply times the number of times that money is spent on goods and services during a period. It thus measures total spending. The right side is nominal GDP. But that is a measure of total spending on goods and services as well. Nominal GDP is the value of all final goods and services produced during a particular period. Those goods and services are either sold or added to inventory. If they are sold, then they must be part of total spending. If they are added to inventory, then some firm must have either purchased them or paid for their production; they thus represent a portion of total spending. In effect, the equation of exchange says simply that total spending on goods and services, measured as MV , equals total spending on goods and services, measured as PY (or nominal GDP). The equation of exchange is thus an identity, a mathematical expression that is true by definition.

To apply the equation of exchange to a real economy, we need measures of each of the variables in it. Three of these variables are readily available. The Department of Commerce reports the price level (that is, the implicit price deflator) and real GDP. The Federal Reserve Board reports M2, a measure of the money supply. For the second quarter of 2008, the values of these variables at an annual rate were

M = $7,635.4 billion

Y = 11,727.4 billion

To solve for the velocity of money, V , we divide both sides of Equation 11.4 by M :

Equation 11.5

Using the data for the second quarter of 2008 to compute velocity, we find that V then was equal to 1.87. A velocity of 1.87 means that the money supply was spent 1.87 times in the purchase of goods and services in the second quarter of 2008.

Money, Nominal GDP, and Price-Level Changes

Assume for the moment that velocity is constant, expressed as V¯ . Our equation of exchange is now written as

Equation 11.6

A constant value for velocity would have two important implications:

• Nominal GDP could change only if there were a change in the money supply. Other kinds of changes, such as a change in government purchases or a change in investment, could have no effect on nominal GDP.
• A change in the money supply would always change nominal GDP, and by an equal percentage.

In short, if velocity were constant, a course in macroeconomics would be quite simple. The quantity of money would determine nominal GDP; nothing else would matter.

Indeed, when we look at the behavior of economies over long periods of time, the prediction that the quantity of money determines nominal output holds rather well. Figure 11.6 “Inflation, M2 Growth, and GDP Growth” compares long-term averages in the growth rates of M2 and nominal GNP for 11 countries (Canada, Denmark, France, Italy, Japan, the Netherlands, Norway, Sweden, Switzerland, the United Kingdom, and the United States) for more than a century. These are the only countries that have consistent data for such a long period. The lines representing inflation, M2 growth, and nominal GDP growth do seem to move together most of the time, suggesting that velocity is constant when viewed over the long run.

Figure 11.6 Inflation, M2 Growth, and GDP Growth

The chart shows the behavior of price-level changes, the growth of M2, and the growth of nominal GDP for 11 countries using the average value of each variable. Viewed in this light, the relationship between money growth and nominal GDP seems quite strong.

Source : Alfred A. Haug and William G. Dewald, “Longer-Term Effects of Monetary Growth on Real and Nominal Variables, Major Industrial Countries, 1880–2001” (European Central Bank Working Paper Series No. 382, August 2004).

Moreover, price-level changes also follow the same pattern that changes in M2 and nominal GNP do. Why is this?

We can rewrite the equation of exchange, MV¯=PY in terms of percentage rates of change. When two products, such as MV¯ and PV, are equal, and the variables themselves are changing, then the sums of the percentage rates of change are approximately equal:

Equation 11.7

The Greek letter Δ (delta) means “change in.” Assume that velocity is constant in the long run, so that %Δ V = 0. We also assume that real GDP moves to its potential level, Y P , in the long run. With these assumptions, we can rewrite Equation 11.7 as follows:

Equation 11.8

Subtracting %Δ Y P from both sides of Equation 11.8 , we have the following:

Equation 11.9

Equation 11.9 has enormously important implications for monetary policy. It tells us that, in the long run, the rate of inflation, %Δ P , equals the difference between the rate of money growth and the rate of increase in potential output, %Δ Y P , given our assumption of constant velocity. Because potential output is likely to rise by at most a few percentage points per year, the rate of money growth will be close to the rate of inflation in the long run.

Several recent studies that looked at all the countries on which they could get data on inflation and money growth over long periods found a very high correlation between growth rates of the money supply and of the price level for countries with high inflation rates, but the relationship was much weaker for countries with inflation rates of less than 10%. [1] These findings support the quantity theory of money , which holds that in the long run the price level moves in proportion with changes in the money supply, at least for high-inflation countries.

Why the Quantity Theory of Money Is Less Useful in Analyzing the Short Run

The stability of velocity in the long run underlies the close relationship we have seen between changes in the money supply and changes in the price level. But velocity is not stable in the short run; it varies significantly from one period to the next. Figure 11.7 “The Velocity of M2, 1970–2011” shows annual values of the velocity of M2 from 1960 to 2011. Velocity is quite variable, so other factors must affect economic activity. Any change in velocity implies a change in the demand for money. For analyzing the effects of monetary policy from one period to the next, we apply the framework that emphasizes the impact of changes in the money market on aggregate demand.

Figure 11.7 The Velocity of M2, 1970–2011

The annual velocity of M2 varied about an average of 1.78 between 1970 and 2011.

Source : Economic Report of the President, 2012, Tables B-1 and B-69.

The factors that cause velocity to fluctuate are those that influence the demand for money, such as the interest rate and expectations about bond prices and future price levels. We can gain some insight about the demand for money and its significance by rearranging terms in the equation of exchange so that we turn the equation of exchange into an equation for the demand for money. If we multiply both sides of Equation 11.1 by the reciprocal of velocity, 1/ V , we have this equation for money demand:

Equation 11.10

The equation of exchange can thus be rewritten as an equation that expresses the demand for money as a percentage, given by 1/ V , of nominal GDP. With a velocity of 1.87, for example, people wish to hold a quantity of money equal to 53.4% (1/1.87) of nominal GDP. Other things unchanged, an increase in money demand reduces velocity, and a decrease in money demand increases velocity.

If people wanted to hold a quantity of money equal to a larger percentage of nominal GDP, perhaps because interest rates were low, velocity would be a smaller number. Suppose, for example, that people held a quantity of money equal to 80% of nominal GDP. That would imply a velocity of 1.25. If people held a quantity of money equal to a smaller fraction of nominal GDP, perhaps owing to high interest rates, velocity would be a larger number. If people held a quantity of money equal to 25% of nominal GDP, for example, the velocity would be 4.

As another example, in the chapter on financial markets and the economy, we learned that money demand falls when people expect inflation to increase. In essence, they do not want to hold money that they believe will only lose value, so they turn it over faster, that is, velocity rises. Expectations of deflation lower the velocity of money, as people hold onto money because they expect it will rise in value.

In our first look at the equation of exchange, we noted some remarkable conclusions that would hold if velocity were constant: a given percentage change in the money supply M would produce an equal percentage change in nominal GDP, and no change in nominal GDP could occur without an equal percentage change in M . We have learned, however, that velocity varies in the short run. Thus, the conclusions that would apply if velocity were constant must be changed.

First, we do not expect a given percentage change in the money supply to produce an equal percentage change in nominal GDP. Suppose, for example, that the money supply increases by 10%. Interest rates drop, and the quantity of money demanded goes up. Velocity is likely to decline, though not by as large a percentage as the money supply increases. The result will be a reduction in the degree to which a given percentage increase in the money supply boosts nominal GDP.

Second, nominal GDP could change even when there is no change in the money supply. Suppose government purchases increase. Such an increase shifts the aggregate demand curve to the right, increasing real GDP and the price level. That effect would be impossible if velocity were constant. The fact that velocity varies, and varies positively with the interest rate, suggests that an increase in government purchases could boost aggregate demand and nominal GDP. To finance increased spending, the government borrows money by selling bonds. An increased supply of bonds lowers their price, and that means higher interest rates. The higher interest rates produce the increase in velocity that must occur if increased government purchases are to boost the price level and real GDP.

Just as we cannot assume that velocity is constant when we look at macroeconomic behavior period to period, neither can we assume that output is at potential. With both V and Y in the equation of exchange variable, in the short run, the impact of a change in the money supply on the price level depends on the degree to which velocity and real GDP change.

In the short run, it is not reasonable to assume that velocity and output are constants. Using the model in which interest rates and other factors affect the quantity of money demanded seems more fruitful for understanding the impact of monetary policy on economic activity in that period. However, the empirical evidence on the long-run relationship between changes in money supply and changes in the price level that we presented earlier gives us reason to pause. As Federal Reserve Governor from 1996 to 2002 Laurence H. Meyer put it: “I believe monitoring money growth has value, even for central banks that follow a disciplined strategy of adjusting their policy rate to ongoing economic developments. The value may be particularly important at the extremes: during periods of very high inflation, as in the late 1970s and early 1980s in the United States … and in deflationary episodes” (Meyer, 2001).

It would be a mistake to allow short-term fluctuations in velocity and output to lead policy makers to completely ignore the relationship between money and price level changes in the long run.

Key Takeaways

• The equation of exchange can be written MV = PY .
• When M , V , P , and Y are changing, then %Δ M + %Δ V = %Δ P + %Δ Y , where Δ means “change in.”
• In the long run, V is constant, so %Δ V = 0. Furthermore, in the long run Y tends toward Y P , so %Δ M = %Δ P .
• In the short run, V is not constant, so changes in the money supply can affect the level of income.

The Case in Point on velocity in the Confederacy during the Civil War shows that, assuming real GDP in the South was constant, velocity rose. What happened to money demand? Why did it change?

Case in Point: Velocity and the Confederacy

Hannah – Confederate Money – CC BY-NC-ND 2.0.

The Union and the Confederacy financed their respective efforts during the Civil War largely through the issue of paper money. The Union roughly doubled its money supply through this process, and the Confederacy printed enough “Confederates” to increase the money supply in the South 20-fold from 1861 to 1865. That huge increase in the money supply boosted the price level in the Confederacy dramatically. It rose from an index of 100 in 1861 to 9,200 in 1865.

Estimates of real GDP in the South during the Civil War are unavailable, but it could hardly have increased very much. Although production undoubtedly rose early in the period, the South lost considerable capital and an appalling number of men killed in battle. Let us suppose that real GDP over the entire period remained constant. For the price level to rise 92-fold with a 20-fold increase in the money supply, there must have been a 4.6-fold increase in velocity. People in the South must have reduced their demand for Confederates.

An account of an exchange for eggs in 1864 from the diary of Mary Chestnut illustrates how eager people in the South were to part with their Confederate money. It also suggests that other commodities had assumed much greater relative value:

Sources : C. Vann Woodward, ed., Mary Chestnut’s Civil War (New Haven, CT: Yale University Press, 1981), 749. Money and price data from E. M. Lerner, “Money, Prices, and Wages in the Confederacy, 1861–1865,” Journal of Political Economy 63 (February 1955): 20–40.

Answer to Try It! Problem

People in the South must have reduced their demand for money. The fall in money demand was probably due to the expectation that the price level would continue to rise. In periods of high inflation, people try to get rid of money quickly because it loses value rapidly.

Meyer, L. H., “Does Money Matter?” Federal Reserve Bank of St. Louis Review 83, no. 5 (September/October 2001): 1–15.

• For example, one study examined data on 81 countries using inflation rates averaged for the period 1980 to 1993 (John R. Moroney, “Money Growth, Output Growth, and Inflation: Estimation of a Modern Quantity Theory,” Southern Economic Journal 69, no. 2 [2002]: 398–413) while another examined data on 160 countries over the period 1969–1999 (Paul De Grauwe and Magdalena Polan, “Is Inflation Always and Everywhere a Monetary Phenomenon?” Scandinavian Journal of Economics 107, no. 2 [2005]: 239–59). ↵

Principles of Macroeconomics Copyright © 2016 by University of Minnesota is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License , except where otherwise noted.

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How To Do Currency Conversion In Numerical Reasoning Tests

What is a currency conversion question.

Alongside questions on fractions, sequences, charts and basic algebra, a numerical reasoning test will likely include questions on calculating exchange rates.

These questions will involve a currency pair, the exchange rate and a conversion amount. You will be asked to calculate the amount of one currency in the pair received, when converting a volume of the other.

Currency conversation tends not to be a common calculation in our everyday lives. Unless you are an active trader in the forex market, trips abroad are the main context for encountering exchange rates. The calculation is, however, simple to perform once the basic method is grasped.

Success in a numerical reasoning test requires speed and accuracy, so learning how to calculate currency conversion questions rapidly will be of aid when taking the test. Becoming accustomed to the information given, and the calculations required in different question scenarios, will ensure you can tackle any exchange rate question, regardless of the context.

How to read exchange rates

Reading exchange rates is a simple procedure. An exchange rate is made up of a currency pair, and at any given time displays a snapshot into the relationship between the two currencies.

In an exchange rate, the first currency listed stands for one unit of that currency. The exchange rate (typically shown to two decimal places in numerical reasoning questions) indicates what value of the latter currency would purchase one unit of the former.

For example, you may be given the following information:

EUR/USD 1.21

This means that it costs US$1.21 to purchase €1 or, in other words, €1 = US$1.21. From this, you can also calculate how much it costs to buy US$1 using EUR, by dividing 1 by the exchange rate.

1/1.21 = 0.82

So, this means it costs €0.82 to purchase US$1 or, in other words, US$1 = €0.82. This price is reflected in the inverted currency pair:

USD/EUR 0.82

You may be faced with questions that ask about the first or the second currency in the given pair.

The currency pairs used in the questions may vary and could include popular currencies such as the GBP (British Pound), CHF (Swiss Franc), CAD (Canadian Dollar), AUD (Australian Dollar), NZD (New Zealand Dollar) and JPY (Japanese Yen).

Recognising these abbreviations as relating to currency will help you to rapidly identify a currency conversion question. Regardless of the currencies involved, the way to read the implications of an exchange rate and the conversation calculation steps remain the same.

How to calculate currency conversion

In a currency conversion question, you may get the currency information as part of an explanation, or as statistics in a table. Either way, all the information you need to calculate the answer will be within the question.

You may be asked to calculate the volume of one currency you would receive from a given exchange rate and currency amount. For example:

Sarah has US$750 to convert into GBP for her upcoming trip. The exchange rate currently stands at USD/GBP 0.73. How much money will she have in GBP?

You are being asked to find the volume of the second currency in the pair. First read the exchange rate. In this case, $1 USD = £0.73 GBP.

To calculate the number of British Pounds US$750 yields from this USD/GBP exchange rate, the calculation is as follows:

Unknown currency amount (second currency) = Known currency amount (first currency) x Exchange rate

Exchange rate: USD/GBP 0.73

GBP = USD$750 x 0.73

GBP = £547.50

To convert back to check the amount, divide the number of British Pounds by 0.73 to get the number of US dollars.

If the question gave the same exchange rate information of USD/GBP 0.73, but instead Sarah was intending to convert £750 into US Dollars, the calculation required would be as follows:

You are being asked to find the volume of the first currency in the pair. First, read the exchange rate given: USD/GBP 0.73 (US$1 = £0.73).

Unknown currency amount (first currency) = Known currency amount (second currency) / Exchange rate

USD = GBP £750 / 0.73

USD = $1027.40

The logic behind this is that (as indicated in the How to Read Exchange Rates section), from the information USD/GBP 0.73, we can calculate that £1 = US$1.37 by doing the calculation 1/0.73.

$1.37 x the US$750 Sarah holds = USD $1,027.40

It is important to understand the mechanics of how each conversion amount is calculated and why it is so. This will ensure you can tackle currency conversion in any context or arrangement.

You may also be asked questions involving currency conversion commissions. These involve skills around both currency conversion and percentages. For example:

Tom is converting CAD $200 into EUR, but his provider is charging a 5% commission on the transaction. The exchange rate is CAD/EUR 0.64. How much money (in EUR) does Tom receive to take on holiday?

EUR = CAD $200 x 0.64

5% of 128 = 128 – 5%

The logic behind this is that:

To find 5%: €128 x 5% = €6.40

To calculate the final amount received: €128 – €6.40 = €121.60

Whilst these calculations are fairly simple, understanding the mechanisms will help you to answer the currency conversion questions confidently, regardless of the figures involved.

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How to Solve Currency Conversion Questions in Numerical Reasoning Tests

Ever heard the expression “you can’t compare apples and oranges”? Well the same could be said for currencies. You can’t compare dollars and yen, unless of course you convert the sums properly first. As it turns out, many numerical reasoning tests contain currency conversion questions that ask you to do exactly that.

Below, we’ll discuss why psychometric exams ask currency questions and how job-seekers can best prepare for these screening questions.

What Are Currency Conversion Questions?

If you plan to travel, either for leisure or business, you’re going to find yourself working with other currencies. Whether you’re planning an exotic vacation or flying in for a graduate conference, you’ll need to know how to convert the money you have into the local currency so you can budget for expenses properly. The exchange rate questions on pre-employment aptitude assessments will test to see if you can do just that.

You might also need to convert between currencies if you’re making a purchase online or conducting business with an overseas partner. Investors always make sure to assess the value of the local currency before contributing money to an initiative.

The table above compares different major currencies from countries around the world. Each currency is labelled with the flag of the respective country and the international three-letter abbreviation.

Be careful to read the chart only from left-to-right and not from top-to-bottom. Just start in the left-hand column and read across until you reach the correct column. One bill of the currency in the left-hand column will be worth the number shown of the currency at the top of the respective column. That is to say that 1 USD is equal to 1.3792 AUD and NOT 0.72464 AUD.

How to Solve Currency Conversion Questions?

In order to solve currency conversion problems, you’re going to have to set up proportions relating the exchange rate values presented in the table to the ones you want to determine.

For instance, let’s say I’m travelling from New York to Japan and want to exchange 250 USD into Japanese yen to cover my expenses during my stay. How many Japanese yen will I receive in return for 250 USD?

I’m going to set up a proportion with USD on the top and JPY on the bottom using X for the amount of yen I will receive in return—the sum we want to find.

USD =     1      = 250 JPY    109.526     X

By cross-multiplying, I come up with the following:

X= 27,381.5

In some problems, you’ll have to divide to isolate the variable, but in this question, we get the answer right away. For 250 USD, you’ll receive 27,381.5 JPY.

Which Currency Is Stronger?

We say that one currency is stronger than another if one bill from one currency can purchase more than one bill in another. For instance, if one pound can buy two dollars, we would say the Great British pound is stronger than the United States dollar.

Currency Conversion Tips:

Check out our best currency transformation tips so you’re well prepared when you arrive at the assessment center!

• Check Twice Make sure you check the chart twice before solving the question. You don’t want to answer incorrectly just because you entered the wrong information.
• Keep Values Organized When you set up a proportion, make sure to label carefully. You want to make sure to keep similar values on the same side of the proportion.
• One Step At A Time Sometimes, you’ll have to complete multiple equations to convert from one currency to the another . If this is the case, make sure to keep each equation separate and organized so you can easily check your work later.

Free Currency Conversion Practice:

Put your skills to the test with the currency exchange questions below!

• According to the chart above, 260 USD is equal to how many Argentine Pesos. Round your answer to two places past the decimal point.
• How many Chinese yuan will I receive for 100 Brazilian Real according to the rates in the chart above? Round your answer to the nearest hundredth.
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How to deal with exchange rate risk

If your business exports or imports goods or services, you need to consider how you will protect yourself against changes in the exchange rate. Even a tiny variation in the rate could cost your business thousands of pounds.

You’ll also need to decide how to make and receive payments in foreign currencies.

This guide is aimed at businesses that regularly deal with customers who are based outside of the UK. It explains how to price goods or services, how to combat the risk of exchange rate changes and the practicalities of dealing in foreign currencies.

Foreign currency issues when importing or exporting

Businesses which import or export goods need to bear in mind a number of key issues when making transactions in foreign currencies:

• Foreign currency transactions are sensitive to fluctuations in the exchange rate. A price you agree with a customer or supplier on one day could rise or fall if the exchange rate changes. This is especially true in the current economic climate where currency is fluctuating on a daily basis making it more difficult to keep track of exchange rates. But there are steps you can take to protect yourself against these. (See the section in this guide on how to identify foreign exchange risks).
• If you’re exporting, you must decide whether it’s best to price your goods or services in the local currency of the country with which you’re trading. The decision will depend on individual circumstances and on factors such as how you want to present yourself in that market and how your competitors set their prices.
• If you’re importing components priced in a foreign currency that form part of goods you’re selling in sterling, you’ll need to decide how to price those goods to reflect the exchange rate.
• If you are trading with companies in the eurozone (i.e. the European Union member states that use the euro) there are many practices and standards to make life easier. See our guide on trading in the European Union.

Identify foreign exchange risks

When your business deals in a foreign currency you are exposed to certain risks.

For example, you might find that after agreeing a price for exported or imported goods the exchange rate changes before delivery. Clearly, this can work both for and against you.

Some currencies are more volatile than others because of their unstable economies or inflation. However, the current economic climate is also impacting more stable currencies such as the euro and the US dollar. Your bank should be able to advise you about this.

As exchange rates can go both up and down, it can be tempting to gamble that this will work out in your favour. However, this is extremely risky and could land you with a significant financial loss.

It’s safer to reduce the risk by using one of the forms of hedging available through a bank. Hedging simply means insuring against the price of currency moving against you in the future. There are many different types of currency hedging and your bank should be able to help you with the best solutions for your business.

You could trade overseas in sterling – effectively transferring the foreign exchange risk to the business you’re dealing with. Whether this is appropriate will depend on the product in question and the relative bargaining strength of you and your trading partner.

Bear in mind that exchange rates could have an effect on your business’ competitiveness even if you don’t trade overseas. When a country’s currency loses value against the pound, imports from that country into the UK become cheaper, so you may have to respond to aggressive pricing from competitors who source from that country.

Similarly, if a country’s currency gains value against sterling, UK exports to that country become cheaper.

This article was first published by Business Link. 

Foreign Currency and Exchange Rate Risks © Crown Copyright 2012. Source: www.businesslink.gov.uk

Barclays can help you export successfully

Barclays Business Abroad is a package of discounts and banking tools that can give you a great start in the world of international trade. The package includes all the following:

• Introduction to international trading workshop – an immersive workshop that’ll equip you with the knowledge and capabilities you need to better deal with the pressures of international trade
• Free currency accounts
• 25% discount on all outgoing and incoming international payments
• 25% discount on export document preparation
• 40% discount on credit reports (which help you control your business’ exposure to international risk by giving you accurate information on new overseas customers and suppliers)
• Free exchange rate iAlerts – keeping you up to date with any rate fluctuations that could affect your trading
• Our Exchange Rate Risk interactive online tool will help you understand the level of risk you’re dealing with and the potential impact on your business.

Step by Step

• Getting started
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Problems of Overvalued Exchange Rate

An overvalued exchange rate implies that a countries currency is too high for the state of the economy. An overvalued exchange rate means that the countries exports will be relatively expensive and imports cheaper. An overvalued exchange rate tends to depress domestic demand and encourage spending on imports.

An overvalued exchange rate can also be measured by looking at purchasing power parity PPP . An overvalued exchange rate will mean goods are relatively more expensive in that country. (a more sophisticated form of PPP also takes into account difference in real GDP per capita – Beefed up Big Mac Index at Economist)

An overvalued exchange rate is particularly a problem during a period of sluggish growth. If the economy is booming, an overvalued exchange rate can help reduce inflationary pressure, but in a recession, an overvalued exchange rate can cause further deflationary pressures.

Examples of Overvalued Exchange Rates

2011 – Switzerland and Japan

In 2011, both Switzerland and Japan witnessed an appreciation in their currency. This appreciation occurred because investors were worried about finding secure investments in a period of economic uncertainty. However, because the global economy remained depressed (slow growth, high unemployment), this appreciation was unwelcome. It makes it more difficult to export goods and can lead to lower growth. For an economy like Japan which relies on a strong export sector, this decline in competitiveness could be damaging to their economy.

This is why both Switzerland and Japan sought to intervene to try and reduce the value of their currency.

1992 – UK in the Exchange rate mechanism

In 1990-92, the UK was in the exchange rate mechanism, which involved keeping value of the Pound fixed. But, due to relatively high inflation, markets were putting downward pressure on the Pound and the government had to keep rising interest rates. This caused the recession of 1992. See more detail at ERM

Overvalued Exchange Rates in the Euro

In 2010, countries like Portugal and Greece ran a current account deficit of close to 10%. This is because they didn’t have their own exchange rate to enable a depreciation. In the Euro, they faced an overvalued exchange rate.

Greece and Portugal became uncompetitive because they had relatively higher inflation rates than other Eurozone economies. For example, rising labour costs not met by improved productivity.

This combination of higher prices and lower productivity makes their goods less attractive, leading to more imports and fewer exports; hence the very large current account deficits

If they had their own exchange rate, we would see a devaluation in the currency making exports more competitive and imports cheaper. This would help reduce the size of the current account deficit.

For example, the UK has had a persistent current account deficit, but with an independent exchange rate, the exchange rate can depreciate to reduce the size of the deficit.

Dealing with overvalued exchange rate in Euro

The problem is that in the absence of a floating exchange rate it becomes more painful to solve the current account deficit.

To regain competitiveness, Greece and Portugal will have to rely on deflationary policies . For example, higher tax and lower spending to reduce consumer spending on imports. Also by reducing inflation, this makes exports more expensive.

The problem is that it requires a prolonged period of deflation to regain competitiveness. Also, deflation will bring other problems such as low growth, high unemployment.

Overvalued exchange rate in 1920s UK

In 1925, the UK rejoined the gold standard at the same level as pre First World War. It was hoped that the gold standard would give the economy stability and low inflation.

However, economists generally agree the UK joined at the wrong rate. Since the First World War, the UK had seen a decline in competitiveness and the market level of the Pound had fallen.

To keep the value of the Pound at the Gold Standard level of £1 = $4.85, real interest rates needed to be very high. But, high-interest rates led to depressed demand and lower economic growth.

The overvalued exchange rate also make UK exports uncompetitive, leading to a fall in manufacturing output.

Firms responded to over-valued exchange rate by attempting to cut nominal wages. This cut in wages led to the General Strike of 1926.

Partly due to the overvalued exchange rate, the UK experienced high unemployment, low growth – even before the Great Depression.

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3 thoughts on “Problems of Overvalued Exchange Rate”

• Pingback: Problems of a Strong Currency | Economics Blog

It’s an excellent explanation.

Assume that the country with an open economy has a fixed currency is currently overvalued in the foregion exchange mar true at the official exchange rate?

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Currency Trading Methods and Mathematical Models

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In the fourth chapter there is an analyzes of methods and mathematical models of the processes taking place in the foreign exchange market. The mathematical model of the balance of exchange rates is proposed in this work, conducted its analysis, formulated and solved the problem of the balance. The developed collocational models have a great versatility and allow us to solve the problems of forecasting of exchange market. The estimates of expected rates may be obtained by the extrapolation method. Sufficiently substantiated information helps us to solve the problem of determining the sequence of closed transactions of purchase and sale of currencies that lead to the speculating income. An information decision support system for banks Level 2 in order to adjust exchange rates is developed in order to correct the exchange rates.

• Exchange Rate
• Central Bank
• Assignment Problem
• Currency Market
• National Currency

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Mutanov, G. (2015). Currency Trading Methods and Mathematical Models. In: Mathematical Methods and Models in Economic Planning, Management and Budgeting. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-45142-7_4

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How to solve the currency exchange problem?

I can’t calculate value after exchange Currency exchange Point 6

This solution doesn’t use the denomination argument.

Remember that the currency denomination is a whole number, and cannot be sub-divided.

This task is asking that the exchange be done by converting to a single bill/denomination.

Sorry i don’t understand how to use denomination. Can you explain what to do?

It is explained in Task 3 “Calculate value of bills” that the exchanging booth can only give you cash in certain bill unit (so, for example twelves, hundreds, etc.) and they won’t give you any pennies left from the total. What you wrote in your code will calculate only the total value after the exchange, let’s say it’s 222.75. But they cannot give you full 222.75 because they can only give you money in 50s, so they will give you 200 in 4 bills (and they keep 22.75). If the denomination argument was 20, then they would give you 220 in 11 bills and keep 2.75. You have to calculate the amount of money you will receive using the given denomination. I hope that helps :)

FX scarcity in Nigeria: Causes, challenges and solutions

Nigeria is experiencing a foreign exchange crisis, as FX scarcity drives up the cost of exchanging Naira into US dollars, particularly in the parallel market. 

Nigeria’s currency, the Naira, is currently in distress, having experienced significant volatility and several past devaluations. This has produced numerous negative attendant economic effects, but recent developments have exacerbated the issue. 

In the last few months, the Naira has depreciated significantly in the parallel market while only a slight change has been noticed on the I&E platform – the official platform acknowledged by the Central Bank of Nigeria. 

The Naira’s depreciation in the parallel market has been attributed to an increasing forex demand that does not equate to supply from the bank. Forex demand is primarily to import manufacturing materials and pay bills such as school fees, medical services and tax debt – needs that official supply has not met.

The parallel market has therefore been sought by individuals and businesses in dire need of forex, who are buying at expensive rates. This has put pressure on the Naira, increasing parallel market rates.

Nigeria’s FX scarcity: The situation

The lingering FX scarcity has been an ongoing problem for about two years, which has led to a high inflation rate and knock-on impacts to the wider economy. 

Manufacturers have had to use the parallel market to pay for imported raw materials, increasing the cost of production and therefore the price of end products – ultimately passing the cost on to end consumers.

In a bid to help impacted companies and reduce forex demand pressure, in March 2022 Nigeria’s Federal Inland Revenue Service (FIRS) gave a one-month concession to companies with outstanding foreign currency tax liabilities, enabling them to pay in Naira due to the FX scarcity.

Meanwhile, international students who need forex to pay fees and for upkeep have also been impacted by Nigeria’s FX scarcity. Many have been using parallel markets to pay their fees and have turned to peer-to-peer (P2P) crypto transactions for living expenses. 

Cryptocurrency has also been adopted by manufacturers to pay for some transactions, although there are restrictions on its use in Nigeria: in 2021, the Central Bank of Nigeria banned financial institutions from processing cryptocurrency.

Why Nigeria is experiencing a forex shortage

There are several reasons for Nigeria’s FX scarcity, including inconsistent monetary policies and regulations, but at the core is one issue: Nigeria’s heavy dependence on oil.  

Over the years, Nigeria has relied on earnings from oil sales to receive foreign exchange. According to a recent report by the International Monetary Fund titled Nigeria: Selected Issues Paper , the Nigerian economy has remained highly dependent on oil with limited diversification. In 2020, the total number of export products from Nigeria was 205, compared with an average of 258 for Sub Saharan Africa.

A diversified economy produces products for export and earns foreign exchange from those exports. Oil is essentially the country’s only major exportable product, so forex availability in Nigeria is largely dictated by oil sales. 

In times of high oil demand, this poses less of a problem, however the Covid-19 pandemic and resulting global lockdowns in 2020 had an adverse effect on oil sales globally as use of transport reduced. This resulted in a forex shortage in Nigeria, and so led to the knock-on rise in the parallel market that we are now seeing.

Cap on monthly online transactions

While oil prices are the main driver of FX scarcity in Nigeria, some institutional decisions have exacerbated the problem. 

Some commercial banks in Nigeria have limited customers’ access to forex by putting a cap on online international transactions using Naira debit cards, which puts a further strain on the limited forex supply. The limit used to be $500, which was reduced to $200 in early 2020 and $100 in 2021. In some cases, it is more restrictive: First Bank of Nigeria has an online transaction cap of $50 per month, while Guaranty Trust bank, Zenith, UBA and a host of others cap transactions at $20 per month. Naira cards have also been suspended from cash withdrawals and point of sale transactions internationally.

To counter the inevitable issues that such narrow restrictions create, commercial banks have made it possible for customers to open a domiciliary account that provides access to foreign currency debit cards in US dollar, pound sterling or euro. However, holders of these accounts cannot make online transfers exceeding $10,000, and these must be funded by cash deposits or wire transfers in the relevant currency. Cash withdrawals, meanwhile, are only available when there has been a cash deposit and cannot exceed the amount deposited.

How the Central Bank of Nigeria is responding

The Central Bank of Nigeria (CBN) has taken a number of steps to try and improve foreign currency reserves in the country and boost the liquidity of commercial banks. These have had some implications for remittance operations. Below are some of the actions taken by the CBN to combat the situation.

Disengagement of bureau de change operators

In January 2016, the CBN reduced the sale of forex to bureau de change (BDC) operators in order to eliminate excess liquidity in the system. However, in November 2020, it went further when it suspended sales of forex to BDC operators entirely. 

This was enacted to stabilise the foreign exchange market, as well as block the actions of unofficial remittance operations that had compromised the impact of prior FX-related policies. 

Sourcing forex from diaspora remittances

Another approach the CBN took was to source foreign exchange from remittances sent by the Nigerian diaspora. Nigeria has a large number of migrant workers in other parts of the world who send money back home to family and friends. This makes it the tenth largest recipient of personal remittances globally, with $17.2bn received in 2020, according to the World Bank. 

In December 2020, the CBN issued a ban on remittance payouts in Naira cash. Instead, inbound remittances had to be received in US dollars in cash or be paid to a domiciliary account approved by international money transfer operators such as Western Union and MoneyGram. 

In March 2021, the CBN also incentivised receiving payments in dollars through its Naira 4 Dollar Scheme, which paid remittance recipients an additional 5 Naira for every US dollar they received. 

Automation of Form A

In another attempt to ease access to forex for businesses and individuals, the CBN digitised the process through which forex was applied for. Previously, businesses and individuals had been required to complete a paper application known as Form A. However, in November 2021 this was replaced by an electronic application that only required applicants to provide their bank verification number in order to gain access. 

This was effective for a short while, but after some time issues began to arise. Several applications started getting declined, while those that had been moved to the disbursement stage stayed there for as long as 6-8 weeks without disbursement due to insufficient forex.

RT200 FX Policy

The CBN has also introduced another policy called Race to US$200 billion in FX Repatriation, or the RT200 FX Programme. This is designed to create new strategies for the generation of stable inflows of forex from non-oil exports within the next 3 – 5 years. It does this by making commercial banks responsible for generating their import forex demands from export proceeds. As part of this, the CBN will cease to sell forex to commercial banks on or before December 2022.

Implications for cross-border payment companies

The ongoing FX scarcity in Nigeria has had inevitable knock-on impacts for remittance and money transfer players operating in Nigeria. Here are some of the most notable.

Shutdown of some services to Nigeria

Some cross-border companies have had to stop inward and outward Naira remittance services to Nigeria altogether as a result of the CBN’s regulatory policies enacted in response to the FX crisis. 

Wise is a notable example of this. While the company does still enable US dollar-based transfers to the company, it no longer supports sending Naira to the country.

Multicurrency wallets

Multicurrency wallets have proved to be an effective solution for some. Cross-border companies such as Chipper Cash have made it easier for companies to initiate P2P and B2B cross-border payments through their multicurrency wallets. These typically also provide lower rates than the parallel FX market.

Increase in blockchain transactions

Due to the non-availability of forex, businesses have sought out alternative methods, including blockchain-based solutions using stablecoins. One provider of such services is Cowrie, which provides cross-border payments using NGNT, a stablecoin pegged to the Naira that is developed on the Stellar blockchain. Using this, companies can quickly and easily transfer NGNT into fiat and other cryptocurrencies, providing a cheaper alternative to parallel forex rates.

Investment services

The current Naira volatility has also led to an increase in Nigerian individuals and businesses holding foreign shares or cryptocurrencies, as well as those engaging in exchange-traded funds. 

Several African cross-border payment companies are responding to this demand by offering supporting products. For example, Nigerian multicurrency account Switch by Sterling includes investment products among its range of services.

Solving the Nigerian forex crisis

It is apparent that for the Naira to gain value and the forex situation to improve in a sustainable manner, Nigeria needs to have a diversified economy that is active in international trade besides oil. 

Promoting more exports from Nigeria will provide further sources of foreign exchange,  which will ease pressure on the currency.

In order to help with this, businesses in Nigeria can leverage the African Continental Free Trade Area (AfCFTA) treaty, which eliminates trade tariffs within the continent and reduces heavy dependence on foriegn currencies through instant cross-border payments in local African currencies. 

Unfortunately, many of Nigeria’s small and medium-sized firms are unaware of AfCFTA’s benefits, with a 2021 Centre for the Study of the Economies in Africa survey finding that over 60% of SMEs are unaware of the treaty. 

While there are potential benefits of raising awareness about the ease of exporting for businesses, in the meantime financial alternatives such as multicurrency wallets and blockchain-based money transfers are likely to continue to prove invaluable to those looking to reduce the impact of FX scarcity in Nigeria. 

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Pueblo councilor pushing to eliminate syringe access programs, some say problem won’t be solved

PUEBLO, Colo. (KRDO) - Controversy is brewing over syringe access programs in Pueblo. 

Councilman Roger Gomez is drafting an ordinance to ban the programs, saying needles are becoming a health hazard to his neighborhood. However, others believe the programs are saving lives and worry about what will happen if they are gone.

Gomez said the people he represents want the syringe access programs gone. He said there are needles scattered across the city and it's causing a health issue. This is the reason why he is putting together a city ordinance that would remove the programs altogether if passed. 

"They are very concerned that we may be enabling and condoning this kind of behavior through the needle exchange program," said Gomez.

The CEO of the Southern Colorado Harm Reduction Association, Jude Solano, did not deny that some of the needles found may have came from her organization, but she also noted they could have came from anywhere.

"Yes, there are syringes here and there, but the way it is, the disinformation of blowing it up as if there are piles and piles of syringes, I don't believe it," said Salono.

Salono said drug users need to use sterile needles for each injection to reduce the risk of spreading diseases within the community. 

KRDO 13 spoke with one recovered drug user, Ashley Parsons. She said before coming to the Southern Colorado Harm Reduction Association, she didn't use a sterile needle when she was using. She said she ended up getting a bacterial infection called endocarditis. She said it got so bad, she ended up becoming blind in one eye and a doctor eventually amputated her leg. Parsons eventually was able to find help at the Southern Colorado Harm Reduction Association.

"Prior to becoming a client here, it was hard. It was a struggle to find what you needed. You were sharing needles. You were reusing needles. You weren't doing it safely. You weren't doing it cleanly and you had nowhere to take your used ones," said Parsons.

According to the Centers for Disease Control (CDC), the majority of Syringe Services Programs (SSPs) offer referrals to medication-assisted treatment. The CDC said new users of SSPs are five times more likely to enter drug treatment and three times more likely to stop using drugs than those who don’t use the programs.

The CDC said SSPs prevent overdose deaths by teaching people who inject drugs how to prevent overdoses and how to recognize, respond to, and reverse a drug overdose by providing training on how to use naloxone, a medication used to reverse overdose. Many SSPs provide “overdose prevention kits” containing naloxone to people who inject drugs, according to the CDC.

The city said it does clean-ups routinely to properly dispose of the needles. The city of Pueblo told KRDO13 Thursday that their Team up to Clean up group with Parks and Rec picked up 17,717 needles in 2023 and so far have picked up 3,197 in 2024. Public Works and Code Enforcement do not individually track/count the numbers of needles picked up during their clean ups so they don’t have their totals to add, according to the city of Pueblo.  It's unclear how many needles are found around the city and if they came from the Southern Colorado Harm Reduction Association or the other syringe access program Access Point Pueblo.

KRDO13 crews found a couple of needles in the Bessemer neighborhood and some needles in what appeared to be a sealed medical container on Wednesday.

Councilor Gomez said this proposed ordinance is expected to be introduced by the end of this month. 

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The Accidental Tax Cutter in Chief

President biden says he wants to rake in more money from corporations and high earners. but so far, he has cut more taxes than he’s raised..

This transcript was created using speech recognition software. While it has been reviewed by human transcribers, it may contain errors. Please review the episode audio before quoting from this transcript and email [email protected] with any questions.

From “The New York Times,” I’m Michael Barbaro. This is “The Daily.”

[THEME MUSIC]

Today, in his campaign for re-election, President Biden says that raising taxes is at the heart of his agenda. But as it turns out so far, he’s done the opposite as president. My colleague Jim Tankersley explains.

It’s Wednesday, April 3.

Jim, welcome back. We haven’t seen you since the State of the Union. Always a pleasure.

So, so great to be here. And yeah, I finally recovered from staying up all night with you guys.

Yeah, you don’t even know all night. You stopped and we kept going.

That’s true. I did. I got a robust three hours that night. You’re right.

[LAUGHS]:: So Jim, in your capacity as really the chief economic thinker covering this president, you recently came across something very surprising.

Yeah, it started with a pretty basic question for me. I like to do this crazy thing, Michael, where I like to take candidates’ promises and see if they’ve come true.

It’s a little bit wild, but it’s what I do for fun. And in this case, I wanted to look at a very central promise of President Biden’s campaign in 2020, which he has repeated while in office.

I promise you, I guarantee you we can build back, and build back better with an economy that rewards work, not wealth.

The promise was he was going to raise taxes.

But I tell you what I’m going to do, and I make no apologies for it. I’m going to ask the wealthiest Americans and the biggest corporations of the Fortune 500 companies, 91 making a collective billions of dollars, didn’t pay a single solitary penny in federal tax!

Not taxes on the middle class, not taxes on low income workers, but he was going to raise taxes on corporations and the rich.

But I’m going to make sure they pay their fair share!

He was going to make them pay their fair share. And he leaned into it.

Guess what? You’re going to start paying your fair share. I’m going to ask them to finally begin to pay the fair share. It’s not a punishment. Pay your fair share.

He said it over and over.

Fair share? Translation — it’s back to the failed policies of the 1970s.

Republicans loved this. They repeated it too. They told voters that the president was going to raise taxes.

Joe Biden bragging about raising taxes on corporations. That means less money for those very employers to hire people back.

They talked about all the ways in which corporate tax increases could rebound on workers.

Joe Biden will shut down your economy, raise taxes, wants a $4 trillion tax increase. He’s the only politician I’ve ever seen who said, we will raise your taxes. You’re supposed —

It was a very big part of the economic debate for the campaign.

And I wanted to know, is that true? Has that actually played out in the policy agenda the president has had?

So I asked some economists at the Tax Policy Center in Washington to run an analysis and just say, let’s look at all of the ways Biden has changed the tax code in all of those laws he’s signed, and ask, has he raised taxes as president? And it turns out the answer is he has not raised taxes.

On net, he has cut more taxes than he’s raised.

How much more has he cut taxes than raised them?

So by the math that economists use when they look at budgets, the traditional way of scoring tax changes, he has cut taxes by $600 billion on net.

Hmm. A lot of money, a lot of tax cuts.

It’s a lot of tax cuts. The president has been a net tax cutter.

So Jim, why and how did Biden end up cutting taxes, especially if his stated intent was to raise taxes?

Well, there’s two sides of this equation and two complementary explanations for what’s happened here. The first side is the tax increases that Biden ran on, he’s only done a couple of them. He has trillions of dollars of ideas for how to raise taxes on rich people and corporations. The Treasury Department publishes an entire book full of them every year called “The Green Book.”

But in the actual legislation he signed, there’s only been a couple, really. There was a tax on stock buybacks that companies do and then a new minimum tax for certain multinational corporations that have very low tax rates. Those add up to real money, but they are not, in the grand scheme of Biden’s tax increases, a really large amount of the agenda he’s proposed.

So explanation number one, he just hasn’t been that successful in passing tax increases, and there’s a lot of reasons for that. The biggest one is just the simplest one is that he’s just had a really hard time persuading members of Congress, including Democrats, to back some of his favorite tax increases. He wants to raise the corporate income tax rate, which President Trump cut in his 2017 tax bill. Biden wants to raise it to 28 percent from 21 percent. Congress has not had any appetite to go along with that.

He wanted to get rid of what’s called the carried interest loophole, a long-time white whale of Democratic policy making. But he could not get even 50 Democrats to go along with that. Senator Kyrsten Sinema of Arizona was opposed to it, and so it didn’t get included.

And he did some pieces of legislation on a bipartisan basis. And in those cases, Republicans were just not going to pay for anything by raising taxes, and so he had to take those off the table there. So it’s all added up to just not very much activity in Congress to raise taxes on what Biden wants to do.

Got it. So that’s the side of a ledger where Biden simply fails to increase taxes because he can’t get Congress to increase taxes.

Right. But there’s another side, which is also that Biden has signed into law a decent number of tax cuts.

And that starts from the very beginning. Just a couple of months into his presidency, if you’ll recall, we’re still in the depths of the COVID-19 pandemic, the economy is wobbling after it had started to rebound. Biden proposes what is essentially a stimulus bill.

And he includes some tax cuts in there, a tax cut for families, a child tax credit. And it also includes — you remember those direct checks that people got as part of that bill?

Yes, $1,400. I remember them.

Yes, those were technically tax cuts.

So the stimulus bill starts with that. The next year, he passes this bill that is trying to accelerate manufacturing of things like semiconductors in the United States. That’s the CHIPS Act. And that includes some corporate tax cuts for companies that invest in the kind of manufacturing that Biden wants. This is industrial policy via carrots for corporations. And Biden is handing them out as part of this bill.

So tax cuts there. And then finally the Inflation Reduction Act, which includes the largest climate effort in American history is a bunch of corporate tax cuts at its core, tax cuts for manufacturing of solar panels, tax cuts for people to buy electric vehicles, tax cuts for all sorts of things tied to the transition from fossil fuels to lower emission sources of energy. And those tax cuts add up. They add up for corporations. They add up for individuals. And in the end, that full suite of tax cuts that he’s passed across all of this legislation outweighs the modest tax increases that were also included in the Inflation Reduction Act to reduce its cost.

Got it. So a very big reason why Biden ends up cutting taxes, beyond the fact that he’s not able to raise them through Congress, is that that’s what it took, according to those in his administration, to get American industry and American consumers to change their behavior in line with policy goals such as getting more domestic computer chip manufacturing and getting more people to buy electric vehicles they decided the way to do that was to give people tax breaks, which means he cut their taxes.

Right, people and companies. The president certainly has talked throughout the campaign about wanting to give middle class families a break. But he has also, in the process of crafting policy, really come to rely on tax cuts for people and for corporations as a way of achieving these policy goals. And in many cases, again, this is what he had to do to pass these bills through even Democrats in Congress.

Senator Joe Manchin of West Virginia didn’t want to just send money to companies that were making solar panels. He wanted there to be tax incentives for it. And so that is part of the reason why these were created as tax incentives. And so all of this adds up to more of a tax cutting record than you might have imagined when Biden was on the campaign trail.

I’m curious who really ended up benefiting from these tax cuts. You said they went to people and to corporations, but on the whole, did they end up reaching lower income Americans, middle income Americans, or the rich?

Well, we don’t have a full distributional analysis, which is what you’re asking for, of the entirety of Biden’s tax changes. But what we can say this — particularly the ones that were in that early stimulus bill, the recovery plan, those were very much targeted toward lower income and middle income Americans.

There were income limits on who could get things like the Child Tax Credit. Obviously, the direct payments went to people who were middle class or less. So the analysis of that would suggest that these were tax cuts for lower income people, for middle class people. And on the flip side, what I think we are likely to see with the electric vehicle credit through the Inflation Reduction Act is that while there are some income limits on who can qualify for that credit, that the people who end up claiming that credit tend to be the higher earners among the people who qualify.

Right. Who buys a Tesla, after all? Somebody with a fair amount of money.

Right, exactly. And of course, the corporate tax cuts go to companies, flow through to their shareholders. There’s a huge debate in the academic literature among politicians about how much of that benefit actually ends up going to their workers versus stays with shareholders. But we can broadly say that Joe Biden has done a lot for certain corporations who are trying to advance his manufacturing goals in particular to reduce their tax bills. And that is certainly not in line with the rhetoric you hear him talking about most of the time about making corporations pay their fair share. And the White House acknowledges this. I asked them about it. And they basically said, we think there’s a difference between just cutting the corporate tax rate in a way that helps anybody no matter what they’re doing and what we’re trying to do, which is basically reward corporations for accelerating the energy transition.

Understood. But where does this ultimately leave Biden’s campaign promise to make the tax code fairer and to make sure that the well-off in particular and corporations are paying their, what he calls, fair share?

Well, I think by Biden’s own measurements, by his own ambitions, he would have to agree that he is nowhere close to what he believes would be a fair share for corporations. Because Biden is still running on this. As he enters his re-election campaign, as it really heats up, a rematch with Donald Trump, the president is really leaning into this message of we need to do more. We need to raise more taxes on corporate America. It is time for these companies and for high earners to pay their fair share.

Right. I didn’t get it done in the first term. But if you elect me, I’ll get it done in the second.

Give me another shot, and this time, I promise, will be different.

[MUSIC PLAYING]

We’ll be right back.

So Jim, let’s talk about Biden’s tax raising plans for a theoretical second term and why anyone should have any faith that he could get it done, if there’s a second term, given the experience so far of his first term.

Yeah, well, man, there’s a lot of plans to talk about. I don’t think we can get through all of them, but we can certainly hit the highlights here. So we can start with the couple of things that Biden has been able to do to raise taxes on corporations. He wants to take those and then plus them up.

He’s put this new minimum tax on corporations. It’s a 15 percent minimum tax on certain multinationals. He now wants to raise that to 21 percent.

He wants to take that corporate stock buyback tax which is 1 percent right now, and he’d like to quadruple it to 4 percent. And then he goes after some things large and small. He wants to do new taxes that hit the use of corporate and private jets. He wants to do new taxes on companies that pay large amounts of compensation to their executives.

And then we get to some really big taxes on high earning individuals. So the president has said over and over again, he won’t raise taxes on anyone making less than $400,000 a year. But he’s got a bunch of taxes for the people above that. So he wants to raise the top marginal income tax rate. He wants to take it from 37 percent, which is the level set by President Trump’s 2017 tax law, and bring it back to 39.6 percent, which is what it was before. He also wants to impose what he calls a billionaires tax.

OK. It’s a 25 percent tax on the total value of all of the assets of anyone worth more than $100 million.

OK, wait. I have several questions about this.

First being a fact check, if it’s a billionaires tax, it’s interesting that it’s going after people who have just 100 million.

Yeah, I think most billionaires would be offended at the inclusion of 100 millionaires in that. Yes, totally agree. That is factually inaccurate, the name.

Right. But beyond that, this sounds very much like a wealth tax, which we don’t really have in our system.

Yeah, it’s a sort of wealth tax. The Biden people don’t call it a wealth tax, but it is a tax on something other than income that you report every year to the IRS as having been earned. It goes beyond just, oh, I got interest from my stock holdings or I made money from my job. It’s, oh, the value of my art collection increased last year, and now Biden’s going to tax me on that increase, even if I didn’t sell the art.

That’s a real change, and that reflects the president’s view that people with enough money to buy enormous art collections that appreciate enormously in value should be paying more in taxes.

Right. And of course, a tax like this is extremely perhaps maddeningly hard to actually pull off. It’s hard to get someone to describe their art collection’s value so that you can apply a 25 tax to it. So this might end up being more of a political statement than a practical tax.

Yeah, there’s also questions about whether it’s constitutional. So there’s all sorts of drama around this proposal, but it is certainly, if nothing else, a statement of the president’s intent to make people worth a lot of money pay a lot more in taxes.

OK, so that’s a lot of proposed tax increases, almost all of them focused on those who are rich and corporations. Overall, Jim, what stands out to you about this Biden term two tax increase plan?

I think we could very fairly say that it’s the largest tax increasing plan by a sitting president or a presidential nominee for a party in American history.

He wants to get a lot of money from corporations and people who earn or are worth a lot of money.

But the rub, of course, is it’s hard to see the Congressional math that lets Biden accomplish these tax increases, some of which, like you said, he couldn’t get done the first time. Why would we think he would get them done the second time even if he wins this fall?

Yeah, it would be really difficult. Biden would have to win in November. Democrats would have to take the House of Representatives back from Republicans, which is certainly possible. It’s very closely divided right now. And they’d need to hold at least 50 seats in the Senate. And then those 50 Democrats in the Senate would have to be willing to go along with far more in tax increases than Democrats were last time around.

So if there is a second term, it feels like we should assume it will be very difficult perhaps even quite unlikely he’s going to get to push through a lot of these taxes. Which makes me wonder, Jim, why is Biden running on a tax program that he knows has so little chance of becoming reality and when it’s pretty clear that he’s gotten a lot of stuff done without raising taxes? It turns out that’s not been all that essential to getting infrastructure or climate bills done. So why is he making this so central?

Several reasons. One of them is it’s very important to him rhetorically to talk about fiscal responsibility. Big parts of the Biden agenda, the CHIPS bill, the infrastructure bill, some other legislation, were not actually paid for. The spending and tax cuts were not offset by tax increases.

So they’re going to add to the debt.

Right. So they’re going to add to the debt. Same is true of the stimulus bill. But moving forward, the president has said that he’s going to pay for his agenda and he’s actually going to have some extra tax dollars coming in left over to help pay down future budget deficits. And on paper, it’s the way to pay for Biden’s other big, expansive plans that he hasn’t been able to do but wants to — universal child care, federal paid leave, investing in elder care, just a whole bunch of things that he still wants to do more — housing initiatives.

The president needs money to make a case that he’s being fiscally responsible, and this is the money that would do that.

So that’s one reason. Another reason is the calendar. Biden and his team are looking ahead to the end of 2025, and they know that if he wins another term, he will be in office at a rare moment in Washington, when basically tax policy has to be on the Congressional agenda.

Well, Republicans, when they passed their tax cuts in 2017, set a bunch of them to expire at the end of 2025 in order to lower the cost of the bill.

These are the Trump tax cuts.

The Trump tax cuts. And that includes all the tax cuts for individuals. So now that those are coming due, there’s going to be a fight in Washington over whether to extend them or make them permanent or change them in some way or just let them expire, and Democrats know there’s going to be a huge fight that will reach almost certainly the floor of the House and the Senate. And so Biden wants to be ready.

He wants to be ready with a suite of policy proposals that Democrats can basically pull off the shelf and try to use to put Republicans in a box. Basically say, we would like to keep taxes low or cut them further for low income workers, middle class workers. But we want to pay for that by raising taxes on the rich. You Republicans also want to do nice things for low and middle class workers, but you want to cut taxes for corporations and the rich, and we think that’s a political loser for you.

So Biden is ready with what they think will be a political winner for Democrats in this almost certain floor tax fight at the end of 2025.

And that brings us to the last reason why Biden is doing this, and maybe the most important, which is it’s really good politics.

Just explain that. Why is talking about tax increases, net tax increases, such good politics?

If you talk to Democratic pollsters, if you talk to people inside the White House, outside the White House, political strategists anywhere in Biden’s orbit, they all agree that the public loves the idea of forcing rich people and corporations to pay their, quote, “fair share.” It’s just become a winning and central political argument in Democratic campaigns, the idea that corporations avoid taxes, that rich people avoid taxes, and that Joe Biden is trying to position himself as a champion of the idea that they need to pay more. Those corporations and those rich people need to pay more, and he’s going to make it happen.

You’re describing this as something that is kind of a new political reality. Is that right?

Yeah, it’s evolved over the last decade or so I think. For a long time in Washington, the conventional wisdom was just couldn’t talk about tax increases of any kind. They were poison. There was a whole anti-tax movement that did a really good job of messaging that, and Democratic candidates got very scared of talking about raising taxes even on the very, very rich.

That started to turn over time. But it’s really changed. I think we saw in the 2020 election that the Democratic primary had just enormous amounts of taxes on corporations and the rich funding all sorts of policy proposals — Medicare for all and universal child care and trillions and trillions of dollars — and Democratic candidates like Liz Warren and Bernie Sanders competing to see who could tax corporations and the rich the most.

Biden is a product of that primary. He was one of the most moderate people in that group, but his proposals are really outside of the historical norm for Democratic candidates up until then. And that reflects the fact that pollsters have been doing all this research, finding that the American people, including independents and increasingly numbers of Republicans, just don’t think corporations pay their fair share and are open to the idea they should pay more.

This is really interesting, and it makes me think that what you’re really saying is that there might have been a time when a Democratic nominee like Joe Biden might have reveled in his image as an overall tax cutter. But that is not this moment, and that is not this candidate. He wants to be a tax increaser. He thinks that is where the politics are.

I think that’s exactly right when you think about tax increaser as tax increaser on the rich and on corporations. There’s two ways to be a successful populist politician. One of them is to be like Trump and run around saying you’re going to do enormous tax cuts for everybody, which is a Republican version of populism. Trump, my biggest tax cut in history, I’m going to do another huge, enormous tax cut. It’s going to be so big you won’t believe it.

There might have been a time when Democrats tried to follow that playbook. But Biden’s not doing that. He’s leaning into the other side of populism. He’s telling workers, hey, I’m on your side with these big companies. They’re trying to screw you, and I’m not going to stand for it. And so I’m going to raise their taxes. I’m going to make them pay more so that there’s more money for you, whether that’s more tax cuts or more programs or whatever.

And that is the Democratic version of populism right now, and that’s the one that Joe Biden is running on. And that’s why he’s so happy to talk about raising corporate taxes because it’s a way to tell workers, hey, I’m on your side.

Right. Even if that’s not what he’s done or ever may be able to do.

Yeah. Part of the problem with populism is that you make a lot of promises you can’t keep, and this certainly, in his first term, has been an area where the president has talked a much bigger game than he’s been able to execute. The second term might be different, but that doesn’t really matter for the campaign. What matters is the rhetoric.

Well, Jim, thank you very much. We appreciate it.

Thank you. Always a pleasure.

Here’s what else you need to know today. On Tuesday, Israel confirmed that it had carried out the airstrike that killed seven aid workers delivering food to civilians in Gaza. The attack, which occurred on Monday, struck a convoy run by the World Central Kitchen, a nonprofit group. At the time of the attack, the aid workers were traveling in clearly marked cars that designated them as non-combatants.

Israel’s Prime Minister Benjamin Netanyahu described the attack as unintentional and said that his government deeply regretted the deaths. In its own statement, World Central Kitchen called the strike unforgivable and said that as a result, it would suspend its aid work in Gaza, where millions of people are in dire need of both food and medicine.

Today’s episode was produced by Stella Tan and Mary Wilson with help from Michael Simon Johnson. It was edited by Lisa Chow, contains original music by Dan Powell and Marion Lozano, and was engineered by Chris Wood. Our theme music is by Jim Brunberg and Ben Landsverk of Wonderly.

That’s it for “The Daily.” I’m Michael Barbaro. See you tomorrow.

• April 5, 2024   •   29:11 An Engineering Experiment to Cool the Earth
• April 4, 2024   •   32:37 Israel’s Deadly Airstrike on the World Central Kitchen
• April 3, 2024   •   27:42 The Accidental Tax Cutter in Chief
• April 2, 2024   •   29:32 Kids Are Missing School at an Alarming Rate
• April 1, 2024   •   36:14 Ronna McDaniel, TV News and the Trump Problem
• March 29, 2024   •   48:42 Hamas Took Her, and Still Has Her Husband
• March 28, 2024   •   33:40 The Newest Tech Start-Up Billionaire? Donald Trump.
• March 27, 2024   •   28:06 Democrats’ Plan to Save the Republican House Speaker
• March 26, 2024   •   29:13 The United States vs. the iPhone
• March 25, 2024   •   25:59 A Terrorist Attack in Russia
• March 24, 2024   •   21:39 The Sunday Read: ‘My Goldendoodle Spent a Week at Some Luxury Dog ‘Hotels.’ I Tagged Along.’
• March 22, 2024   •   35:30 Chuck Schumer on His Campaign to Oust Israel’s Leader

Hosted by Michael Barbaro

Featuring Jim Tankersley

Produced by Stella Tan and Mary Wilson

With Michael Simon Johnson

Edited by Lisa Chow

Original music by Dan Powell and Marion Lozano

Engineered by Chris Wood

Listen and follow The Daily Apple Podcasts | Spotify | Amazon Music

In his campaign for re-election, President Biden has said that raising taxes on the wealthy and on big corporations is at the heart of his agenda. But under his watch, overall net taxes have decreased.

Jim Tankersley, who covers economic policy for The Times, explains.

On today’s episode

Jim Tankersley , who covers economic policy at the White House for The New York Times.

Background reading

An analysis prepared for The New York Times estimates that the tax changes President Biden has ushered into law will amount to a net cut of about $600 billion over four years.

“Does anybody here think the tax code’s fair?” For Mr. Biden, tax policy has been at the center of his efforts to make the economy more equitable.

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Jim Tankersley writes about economic policy at the White House and how it affects the country and the world. He has covered the topic for more than a dozen years in Washington, with a focus on the middle class. More about Jim Tankersley

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