Open_Economy_Handout

Open_Economy_Handout - Open Economy Macroeconomics LONG RUN...

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Open Economy Macroeconomics – LONG RUN The level of real exchange rates ( Σ ), the relative price of domestically produced goods in terms of foreign goods, is determined by net supplies of and demands for dollars (or home country currency) generated by net purchases of assets and goods. Σ = eP/P F , where e is the nominal exchange rate (foreign exchange price of the dollar), P is the average price of U.S. goods and services, and P F is the average price of Foreign goods and services. The exchange rate adjusts so that (in the market for dollars or home currency): Quantity Demanded = Quantity Supplied where Quantity Demanded equals dollars demanded by foreigners to purchase U.S. assets [Stocks, Bonds, Direct Investment in Capital, etc. – CAPITAL INFLOWS (CI)] and dollars demanded to purchase U.S. produced goods and services [EXPORTS (EX)]. Quantity Supplied equals dollars supplied to purchase Foreign assets [CAPITAL OUTFLOWS (CO)] and dollars supplied to purchase foreign produced goods and services [IMPORTS (IM)].
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In the market for dollars the exchange rate adusts so that Quantity Demanded = Quantity Supplied
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Open_Economy_Handout - Open Economy Macroeconomics LONG RUN...

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