Econ 333 Dec 2 Ch 15

Econ 333 Dec 2 Ch 15 - Exchange Rates: A Basic Model...

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Unformatted text preview: Exchange Rates: A Basic Model Chapter 15 What determines exchange rates? Changes in income in 2 countries Income falls relatively rare Relative prices of 2 countries Inflation more common than deflation Relative interest rates in 2 countries Interest rates rise and fall Volatility of interest rates exceeds income/prices What is money? 3 functions: medium of exchange, unit of account, and store of value Measures of money Monetary Base=Cash + Bank Reserves M1=MB + Demand Deposits (Narrow Money) M2=M1 + Time Deposits and MMFs (Broad Money=Narrow Money + Near Money) Money Supply: Fractional Reserve Banking M=MB/rr (money = monetary base divided by required reserves Bank T account: $100 deposit to bank and 10% reserve requirement means lending is: $100 $90, $81, $72.90, . . . Sums to $1,000=100/(0.1) $100 deposit and rr=20%: $100, $80, $64, $51.20, . . . Sums to $500 Goals and Tools of Federal Reserve Goals: Maximum employment Stable prices Moderate long-term interest rates Promotion of sustainable economic growth Tools Open market operations Discount rate Change reserve requirements Financial Crisis Means These Tools Arent Enough Lending not available at any interest rate...
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This note was uploaded on 09/23/2009 for the course ECON 333 taught by Professor Roberts during the Spring '09 term at Ill. Chicago.

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Econ 333 Dec 2 Ch 15 - Exchange Rates: A Basic Model...

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