Lec11f09%20Second%20Shifts

# Lec11f09%20Second%20Shifts - Second Shifts P So Far The...

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1 Second Shifts Learn about Exchange Market, the interactions of the goods market with potential output, and about the interactions of the three markets with one another. Lecture 9, Tuesday, September 20 So Far: The Goods Market Aggregate Demand C I = I (r, exp) G X = X M = M Aggregate Supply Input costs (labor, machinery, materials) Technology Natural conditions P Q AS AD Qp So Far: The Money Market Money Demand Money Supply Federal Reserve Policy r QM MS MD Exchange Rate: “Value of the Dollar” The “price” of one nation’s currency in another nation’s currency. The amount of another nation’s currency that traders will offer for one unit of your own. Exchange Rates, U.S. Dollar, August 19, 2011 One U.S. dollar exchanged for: 0.98 Canadian dollars 12.2 Mexican pesos 0.60 British pounds 0.69 European euros 76.5 Japanese yen 6.39 Chinese yuan 29.8 Thai baht You can invert exchange rates. . . If one U.S. dollar exchanges for 12.2 Mexican pesos Then one Mexican peso exchanges for 0.08 U.S. dollars (8 cents) 1 / 12.8 = 0.08

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2 Export an American CD Costs \$12.00, in 2001 and 2011 Exchange rate, 2001: 1.12 euros/dollar CD cost \$12 x 1.12 = 13.44 euros The value of the dollar falls. . . “weaker” Exchange rate, 2011: 0.69 euros/dollar CD costs \$12 x 0.77 = 8.28 euros Import a German clock Costs 100 euros, in 2001 and 2011 Exchange rate, 2001: 1.12 euros/dollar Clock cost 100 / 1.12 = \$89 The value of the dollar falls. . . “weaker” Exchange rate, 2010: 0.69 euros/dollar Clock costs 100 / 0.69 = \$145 As the value of the dollar falls. . . U.S. exports become less expensive for foreigners to buy so they buy more Foreign imports become more expensive for Americans to buy so we buy less The Goods Market Aggregate Demand C I = I (r) G X = X (xr) M = M (xr) Aggregate Supply Input costs (labor, machinery, materials) Technology Natural conditions P Q AS AD The exchange rate determines exports and imports. But what determines the exchange rate? QUANTITY SUPPLY DEMAND Equilibrium Price Equilibrium Quantity EXCHANGE RATE: VALUE OF THE DOLLAR QUANTITY OF DOLLARS TRADED DOLLAR SUPPLY DOLLAR DEMAND The Exchange Market Why demand dollars?
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Lec11f09%20Second%20Shifts - Second Shifts P So Far The...

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