26-int trade - Trade & Macro Lecture 26-PREVIEW Dr....

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macroS2010 Lec26-page 1 http://www.arts.cornell.edu/econ/wissink/econ102jpw/ Lecture 26-PREVIEW Dr. Jennifer P. Wissink ©2009 Jennifer P. Wissink, all rights reserved. April 28, 2010
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macroS2010 Lec26-page 2 http://www.arts.cornell.edu/econ/wissink/econ102jpw/ Stories To Follow. .. Stocks Resume Fall on Fears Over European Debt Crisis (NYT) “Shares slumped between 1 to 2 percent across much of Europe and Asia, and the euro briefly fell to its lowest level in about a year against the dollar , as investors worried that Portugal, Spain and even Ireland may not be able to borrow the billions of dollars they need to finance their government spending.” “Later in the day, Mr. Strauss-Kahn was to join Chancellor Angela Merkel and heads of the World Bank , the World Trade Organization , the International Labor Organization and the Organization for Economic Cooperation and Developme for a gathering that was pre-planned but fortuitously timed to consider Greece’s increasingly dire situation.”
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macroS2010 Lec26-page 3 http://www.arts.cornell.edu/econ/wissink/econ102jpw/ The Equilibrium Exchange Rate An excess supply of pounds will cause the price of pounds to fall—the pound will depreciate (fall in value) with respect to the dollar. An excess demand for pounds will cause the price of pounds to rise—the pound will appreciate (rise in value) with respect to the dollar.
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http://www.arts.cornell.edu/econ/wissink/econ102jpw/ Factors that Affect Exchange Rates Purchasing Power Parity: The Law of One Price If the costs of transportation are small, the price of the same good in different countries should be roughly the same. If the law of one price held for all goods, and if each country consumed the same market basket of goods, the exchange rate between the two currencies would be determined simply by the relative price levels in the two countries. The theory that exchange rates are set so that the price of
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26-int trade - Trade & Macro Lecture 26-PREVIEW Dr....

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