ECO2004S Summary that will change everything! (1).pdf

E r1 01 currency in terms domestic ie 1 r10 netary

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c currency in terms of foreign i.e R1 = $0.1 currency in terms domestic i.e $1 = R10 netary policies: n change the pes of bond in mand = y sumers e government G and thereby RKET quotas wnership on e to move work d by the real al vs. foreign consume ods relative to 1 use
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Nominal exchange rate - Depreciation in - Appreciation in strengthens When an economy has - Revalua the excha - Devalua the excha We use the price index We say: E Where: EP = price of goods in S P * = price of goods in U We say there is real ap The exchange rate chan 1. Fluctuati 2. Fluctuati If inflation between cou real E vs nominal E wo Bilateral exchange rate Multilateral exchange r Openness in the financial m Financial investors hol Trade deficit = country foreign reserves from t e (E) = domestic in terms of foreign currenc n domestic currency fall exchange rate n domestic currency rise in the exchange a fixed exchange rate we say: ations , rather than appreciations, which are ange rate ations , rather than depreciations, which are ange rate x to work out the real exchange rates betwe = EP/P * SA USD ppreciation or depreciation in the exchange nges for two reasons: ions in nominal exchange (E) ions in P/P * untries were equal i.e. P= P * , P/P would be ould move toghther e = rates between two countires rate = rates between multiple countries market ld domestic and foreign goods in order to d y buys more than it sells and pays for the di the rest of the world cy R weakens e rate R e increases in re decreases in een countries e rate e constant and diversify ifference using
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Balance of payments B take place between one - imports a - tourist ex - interest a - purchase The Interest Rate Parity Con Choice between domes The interest parity con rate and SA bond retur Two decisions: 1. Holding d 2. Holding d paying as Decision is based on ex If a person wants to ho and US bonds have the BoP = systematic summary of all the transac e country’s residents and the Rest of the W and exports of goods and services xpenditures and dividends paid and received e or sale of financial assets ndition stic and foreign assets ndition states that if the exchange rate = rea rn = US bond return, then investors are ind domestic money vs. foreign money domestic interest-paying assets vs. foreign ssets xpected changes in the interest rate old SA and USA bonds then the following m e same rate of return ctions that World al exchange different n interest- must hold i.e. SA
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The approximation of t must be equal to foreig foreign currency Through the interest ra rate (E) by looking at p CHAPTER 19: OPNESS IN Goods market in an open ec In a closed economy do In an open economy th domestic consumers an IS in an open economy Z Where: E = the real exchange r - IM = the part of domes this condition is given by the idea that the i gn exchange rates minus the expected depr ate parity condition one can find the expec preferences in the bond market N THE GOOD MARKET conomy omestic demand = demand for domestic go
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