Lecture 17 -Spring 2010 - Lecture 17 Foreign exchange rate...

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Lecture 17 1 of Professor David Lee AEM-ECON 2300 Foreign exchange rate is the PRICE of foreign currency denominated in terms of domestic currency • In this sense, the foreign exchange rate is a price, like any other price.
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Lecture 17 2 of Professor David Lee AEM-ECON 2300 Functions of money: 1. Medium of exchange 2. Unit of account 3. Store of value U.S. money supply(ies): M1 = currency + demand deposits + other checkable deposits + travelers checks M2 = M1 + savings deposits + MMF M3 = M2 + savings bonds + short-term treasury securities + commercial paper
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Lecture 17 3 of Professor David Lee AEM-ECON 2300 Two observations about exchange rates: 1. Demand and supply of foreign exchange are two sides of the same phenomenon 2. Foreign exchange rate represents equilibrium price as in any other market P P* P’ D (U.S.) S (Germany)
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Lecture 17 4 of Professor David Lee AEM-ECON 2300 Foreign exchange market (euros) P (in $) 1.35* D (U.S.) S (Germany) Demand for € : - U.S. demand for German goods and services - Demand to invest in Germany Supply of € : - German demand for U.S. exports - Demand for $ to invest in U.S. Q *Quote as of 04/19/10
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5 of Professor David Lee AEM-ECON 2300 U.S. Dollar market P $ (in €) 0.74* D $ (Germany) S $ (US) Demand for $ : - Foreign (German) demand for U.S. exports - Demand to invest in U.S. Supply
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Lecture 17 -Spring 2010 - Lecture 17 Foreign exchange rate...

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