Ch10 - CHAPTER 1 0 The Exchange Rate and the Balance of...

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The Exchange Rate and the Balance of Payments CHAPTER 10
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After studying this chapter you will be able to Describe the foreign exchange market, define the exchange rate, and distinguish between the nominal exchange rate and the real exchange rate Explain how an exchange rate is determined day by day Explain the long-run trends in the exchange rate and explain interest rate parity and purchasing power parity Describe the balance of payments accounts and explain what causes an international deficit Describe the alternative exchange rate policies and explain their long-run effects.
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Many Monies! The dollar, the yen, and the euro are three of the world’s monies. But they are among more than 100 different monies that circulate in the global economy. The dollar and the yen have been around for a long time. The euro was created in the 1990s. In August 2002, 1 dollar bought 1.02 euros. In August 2006, 1 dollar bought 0.78 euros. Why do currency exchange rates fluctuate? The U.S. economy has become attractive to foreign investors. What determines the amount of international borrowing and lending?
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Currencies and Exchange Rates To buy goods and services produced in another country we need money of that country. Foreign bank notes, coins, and bank deposits are called foreign currency. We get foreign currency in the foreign exchange market.
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Currencies and Exchange Rates The Foreign Exchange Market We get foreign currency and foreigners get U.S dollars in the foreign exchange market. The foreign exchange market is the market in which the currency of one country is exchanged for the currency of another.
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Currencies and Exchange Rates Foreign Exchange Rates The price at which one currency exchanges for another is called a foreign exchange rate . A fall in the value of one currency in terms of another currency is called currency depreciation . A rise in value of one currency in terms of another currency is called currency appreciation .
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Currencies and Exchange Rates Figure 10.1 shows how the U.S. dollar has moved against other currencies from 1995 to 2005.
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Currencies and Exchange Rates Nominal and Real Exchange Rates The nominal exchange rate is the value of the U.S. dollar expressed in units of foreign currency per U.S. dollar. It is a measure of how much of one money exchanges for a unit of another currency. The real exchange rate is the relative price of foreign- produced goods and services. It is a measure of the quantity of real GDP of other countries that we get for a unit of U.S. real GDP.
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Trade-Weighted Index The trade-weighted index is the average exchange rate of the U.S. dollar against other currencies, with individual currencies weighted by their importance in U.S. international trade.
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This note was uploaded on 04/15/2009 for the course MACROECON 220 taught by Professor Shef during the Spring '09 term at Rutgers.

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Ch10 - CHAPTER 1 0 The Exchange Rate and the Balance of...

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