lecture3 - Overview Last time Chapter 13 The foreign...

Info icon This preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Overview Last time, Chapter 13: The foreign exchange market. We found an equilibrium exchange rate, but we took each country’s interest rates R$ and R€ as given. Today, Chapter 14 Part 1: Where do R$ and R€ come from? The money market: money supply and demand. This will be familiar from intermediate macro. The new twist: How does money market relate to ForEx market? How does it affect exchange rate determination? Note: Homework 1 is due Wednesday.
Image of page 2
Money market overview Money market: demand M d and supply M s . The market-clearing price is the interest rate R. Important characteristic of money: it is liquid enough to be used as a means of payment to buy goods. Include here cash (M0) and checking deposits. Sum is called M1. Exclude the large bank deposits traded by participants in the foreign exchange market. They are typically in a form that is less liquid. Money supply : we regard as set by the central bank. That is, for the moment we consider it to be an exogenous policy variable that we take as given. In more refined models it might be endogenous: e.g., the central bank may follow a policy rule .
Image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Aggregate Money Demand recap Money demand (M d ) is a function of three variables: Interest rate (R): What could earn on an alternative asset. Opportunity cost, since money pays no interest. If R rises, money demand falls.
Image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern