Lecture_25_2010 - Intermediate Macroeconomics Bruce Preston...

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Intermediate Macroeconomics Bruce Preston April 27, 2010
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Today Exchange rates Chapter 17 Global Savings Glut: Bernanke Thursday: International trade
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Some International Issues Business cycles across countries are connected by International trade in goods and services A key determinant of these trade ±ows is the exchange rate
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Relative Prices Once Again The nominal exchange is the rate at which one currency trades for another E.g.: in 2006 $1 could be traded for 0.78 Euro A rise in the price is an appreciation
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The Law of One Price In the long run, goods must sell of the same price across countries Called the law of one price Formally EP = P w That is: E euros dollar ± ± P dollars good ! = P w euros good !
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Quantity Theory Revisited In a given country, in the long run the price level is determined by money supply growth The law of one price then determines the nominal exchange rate E = P w P For example, over the long term depreciation of the US dollar against the Yen determined by relative in&ation performance
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The Real Exchange Rate Adjusts the nominal exchange rate for the relative price of home and foreign goods Formally real exchange rate = EP P w Units: the number of foreign goods require to purchase a unit of home goods
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This note was uploaded on 02/27/2011 for the course ECONOMICS 201 taught by Professor P during the Spring '11 term at Columbia College.

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Lecture_25_2010 - Intermediate Macroeconomics Bruce Preston...

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