Lecture_16___Fall_2007

Lecture_16___Fall_2007 - Lecture 18 1 of rofessor David Lee...

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Unformatted text preview: Lecture 18 1 of rofessor David Lee AEM 230 / ECON 230 Foreign exchange rate is the PRICE of foreign currency denominated in terms of domestic currency • In this sense, the foreign exchange rate is a price, like any other price. Lecture 18 2 of rofessor David Lee AEM 230 / ECON 230 Functions of money: 1. Medium of exchange 2. Unit of account 3. Store of value U.S. money supply(ies): M1 = currency + demand deposits + other checkable deposits + travelers checks M2 = M1 + savings deposits + MMF M3 = M2 + savings bonds + short-term treasury securities + commercial paper Lecture 18 3 of rofessor David Lee AEM 230 / ECON 230 Two observations about exchange rates: 1. Demand and supply of foreign exchange are two sides of the same phenomenon Lecture 18 4 of rofessor David Lee AEM 230 / ECON 230 Two observations about exchange rates: 1. Demand and supply of foreign exchange are two sides of the same phenomenon 2. Foreign exchange rate represents equilibrium price as in any other market Lecture 18 5 of rofessor David Lee AEM 230 / ECON 230 Two observations about exchange rates: 1. Demand and supply of foreign exchange are two sides of the same phenomenon 2. Foreign exchange rate represents equilibrium price as in any other market P € P* € P’ € D € (U.S.) S € (Germany) Lecture 18 6 of rofessor David Lee AEM 230 / ECON 230 Foreign exchange market (euros) P € (in $) 1.46* D € (U.S.) S € (Germany) Demand for € : - U.S. demand for German goods and services- Demand to invest in Germany Supply of € : - German demand for U.S. exports- Demand for $ to invest in U.S. Q € *Quote as of 11/06/07 Lecture 18 7 of rofessor David Lee AEM 230 / ECON 230 U.S. Dollar market P $ (in €) 0.69* D $ (Germany) S $ (US) Demand for $ : - Foreign (German) demand for U.S. exports- Demand to invest in U.S. Supply of $ : - U.S. demand for German exports- Demand for investments in Germany Q $ *Quote as of 11/06/07 Lecture 18 8 of rofessor David Lee AEM 230 / ECON 230 factor change effect on dollar's exchange value foreign demand for US exports decrease depreciation increase appreciation foreign demand for US assets decrease depreciation (stocks, bonds, bank deposits) increase appreciation US demand for foreign exports decrease appreciation increase depreciation US demand for foreign assets decrease appreciation increase depreciation US price level* decrease...
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This note was uploaded on 02/19/2008 for the course AEM 2300 taught by Professor Lee,d.r. during the Fall '06 term at Cornell.

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Lecture_16___Fall_2007 - Lecture 18 1 of rofessor David Lee...

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