ECON 102 1st Edition Lecture 34 Outline of Last Lecture 1 Open Economy Part I a Balance Payments b EX International Capital Flows c Exchange Rates Outline of Current Lecture I Open Economy Part II a Exchange Rates b Exchange Rate Policies Current Lecture Exchange Rates Currencies are traded in the foreign exchange market The prices at which currencies trade are known as exchange rates When a currency becomes more valuable in terms of other currencies it appreciates When a currency becomes less valuable in terms of other currencies it depreciates The equilibrium exchange rate is the exchange rate at which the quantity of a currency demanded in the foreign exchange market is equal to the quantity supplied An increase in the demand for US dollars Appreciation of US dollars A decrease in the demand for US dollars Depreciation of US dollars Real exchange rates are exchange rates adjusted for international differences in aggregate price levels Real exchange rate EX Mexican pesos per U S dollars PUS PMex The purchasing power parity between two countries currencies is the nominal exchange rate at which a given basket of goods and services would cost the same amount in each country Exchange Rate Policy An exchange rate regime is a rule governing policy toward the exchange rate A country has a fixed exchange rate when the government keeps the exchange rate against some other currency at or near a particular target These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute A country has a floating exchange rate when the government lets the exchange rate go wherever the market takes it Government purchases or sales of currency in the foreign exchange market are exchange market interventions Foreign exchange reserves are stocks of foreign currency that governments maintain to buy their own currency on the foreign exchange market Foreign exchange controls are licensing systems that limit the right of individuals to buy foreign currency
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