The Foreign Exchange Market
The Foreign Exchange Rate and the Market for Foreign Exchange
Foreign exchange rate: the price of one currency in terms of another.
e.g., US$/ or /US$
The foreign exchange rate is determined by the interaction of demand for and
The Monetary and Portfolio Balance Approaches to External Balance
The Monetary Approach to the Balance of Payments
The monetary approach to the balance of payments argues that the BOP is
mainly a monetary phenomenon.
This approach requires us to consider
Price Adjustments and Balance-of-Payments Disequilibrium
The Price Adjustment Process and the Current Account Under A Flexible Rate System
A depreciation of the home currency causes foreign goods to become more
expensive, reducing consumption of imports r
International Financial Markets and Instruments: An Introduction
International Bank Lending
Banks balance sheets commonly have loans and deposits that are international in
As of 2011, gross international bank lending was $35.9 trillion!
Economic Policy in the Open Economy Under Flexible Exchange Rates
The Effects of Fiscal and Monetary Policy Under Flexible Exchange Rates
Under a flexible exchange rate system, combinations of income and interest rates not on
the BP curve will cause diseq
Fixed or Flexible Exchange Rates?
Do Fixed or Flexible Exchange Rates Provide Greater Discipline?
Some argue for fixed exchange rates:
As weve seen, with a fixed rate system, there should be no tendency for greater
inflation in one country than in the wor
The International Monetary System: Past, Present, and Future
Bretton Woods: Goals of the IMF
To seek stability in exchange rates.
Reconciliation of country adjustments to payments imbalances with national autonomy in
To help preserve
National Income and the Current Account
The Current Account and National Income
Aggregate spending is the focus of the Keynesian income model.
Prices and interest rates are assumed to be constant.
The economy is assumed to not be at full employment.
Economic Policy in the Open Economy Under Fixed Exchange Rates
Targets, Instruments, and Policy: A Model
Any decrease in the interest rate (e.g., because of expansionary monetary policy)
will cause a decrease in short-term capital inflows
Prices and Output in the Open Economy: Aggregate Supply and Demand
Aggregate Demand in the Closed Economy
In the closed economy, macroeconomic equilibrium occurs where IS and LM curves
When prices change, IS curve is not affected.
When prices c