The Open Economy

The Open Economy - PRINCIPLES OF MACROECONOMICS The Open...

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PRINCIPLES OF MACROECONOMICS The Open Economy The Foreign Exchange Market o Currencies are traded in the foreign exchange market o Foreigners who want to buy another country’s domestic goods, services, and assets demand domestic currency o Domestic residents who want to buy foreign goods, services, and assets supply domestic currency. o The prices at which currencies trade are known as exchange rates The Nominal Exchange Rate o The nominal exchange rate is the rate at which one country’s currency trades for another country’s currency o Exchange rates are generally expressed as foreign currency per unit of domestic currency. o EXAMPLE: To describe the exchange rate between the British pound and the US dollar: o In the US, £0.502 = $1 or 0.502 British pounds per US dollar o In Britain, $1.992 = £1 or 1/0.502 = 1.992 US dollars per British pound The Foreign Exchange Market o $1 trillion worth of currency is traded every day o Financial institutions employ currency traders who buy and sell currency deposits in banks. o The financial pages report the resulting exchange rates o When businesses and individuals buy foreign currency from a bank, they receive fewer units of currency than indicated by the exchange rate. Appreciation and Depreciation
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The Open Economy - PRINCIPLES OF MACROECONOMICS The Open...

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