Lecture6--THREEKEYMARKETS

Lecture6--THREEKEYMARKETS - Three Key Markets in the...

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Unformatted text preview: Three Key Markets in the Economy 1.Foreign Exchange Markets x 2.Labor Markets x 3.Credit Markets x Foreign exchange markets are a means of trading the money of one nation for that of another. Foreign Exchange Markets x x A demand for dollars is generated when foreigners want to buy dollars to acquire U.S. goods, services or U.S. 145 assets A supply of dollars is generated when holders of dollars want acquire foreign goods, services or assets Foreign Exchange rate (Yen per dollar) Supply Demand Dollars (Millions per Day) Foreign Exchange Markets x A Decrease in the demand for U.S. dollars by Japanese holders of yen will cause the foreign exchange rate of the dollar in terms of yen to fall Foreign Exchange rate (Yen per dollar) Supply 145 Demand Dollars (Millions per Day) Foreign Exchange Markets x A Decrease in the demand for U.S. dollars by Japanese holders of yen will cause the foreign exchange rate of the dollar in terms of yen to fall Foreign Exchange rate (Yen per dollar) Supply 145 100 Initial Demand New Demand Dollars (Millions per Day) Currency Conversion Dollar Price =( Price in Foreign Currency)( Exchange Rate) Dollar Price = (Yen Price) (Dollars/yen) At an exchange rate of 145 yen per dollar a 50,000 yen Japanese camera costs: (50,000)(1/145) = $344.83 At an exchange rate of 100 yen per dollar the 50,000 yen Japanese camera will cost: (50,000)(1/100) = $500 Impact of A Change in the Foreign Exchange Rate Other things being equal, a decrease in the foreign exchange value of the dollar makes our exports cheaper in terms of foreign currency but makes imports more expensive in terms of dollars x Other things being equal, an increase in the foreign exchange value of the dollar makes our exports more expensive in terms of foreign currency but makes imports cheaper terms of dollars x Labor Markets x x Labor markets are for the trading of various types of labor services The price of labor services is called wages (expressed as dollars per hour) or salaries (expressed as dollars per year or month) Labor Markets Wages or Salary x x Equilibrium wages (or Salaries) are determined by conditions of supply and demand in various labor markets Changes in demand for or supply of labor will change wages and employment levels w Supply of Labor Demand for Labor L Labor Labor Market Reaction to a Decrease in Demand Wages or Salary x Labor markets sometimes do not immediately achieve a new equilibrium in response to a decrease in demand as occurs in a recession w Supply of Labor Demand for Labor L Labor Labor Market Reaction to a Decrease in Demand Wages or Salary x x Labor markets sometimes do not immediately achieve a Supply of new equilibrium in Labor $10 response to a decrease $8 Initial Demand in demand as occurs in for Labor a recession The result of Labor surplus New Demand downwardly rigid wages is increased L' L2 L1 Labor unemployment Credit markets allow people to borrow money x x The price of credit is the interest rate usually expressed as a percent per year Interest depends on the supply and demand for loanable funds for various purposes Credit Markets Interest rate x x Equilibrium interest rates are determined by conditions of supply and demand in 6% various credit markets Changes in demand for or supply of credit will change interest rates and equilibrium borrowing Supply of Credit Demand for Credit Q Loanable funds The Government Budget Deficit and Credit Markets Interest rate x x Government borrowing to cover a budget deficit adds to demand in credit 6% markets Other things being equal the increased demand increases equilibrium interest rates Supply of Credit Demand for Credit Q Loanable funds The Government Budget Deficit and Credit Markets Interest rate x x Government borrowing to cover a budget deficit adds to 8% demand in credit 6% markets Other things being equal the increased Reduced demand increases private borrowing equilibrium interest rates and "crowds out" Q' Q1Q2 private investment Supply of Credit Private + Government Demand Private Demand for Credit Loanable funds ...
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This note was uploaded on 10/13/2008 for the course EC 205 taught by Professor Hymen during the Fall '08 term at N.C. State.

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