EC202 1nd Edition Lecture 36Outline of Last Lecture I. Nominal exchange ratesII. Changes in valueOutline of Current Lecture II. Flexible exchange rateIII. Fixed exchange rateIV. Real exchange rateCurrent Lecture-Flexible exchange rate-An exchange rate whose value is not officially fixed but varies according to the supply and demand for the currency in the foreign exchange market-Also known as a floating exchange rate-Varies according to the supply and demand for the currency-Foreign exchange market-The market on which currencies of various nations are traded for one another-Fixed exchange rate-An exchange rate whose value is set by official government policy-Argentina fixing their currency to the U.S. dollar-Under the gold standard, nations fixing currency values in terms of ounces of gold-Real exchange rate-The opportunity cost (price) of the average domestic good or service in terms of the quantity of the average foreign good or service sacrificedThese 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.-1.25 Japanese computers/U.S.-made computer-e is the nominal exchange rate-The number of units of foreign currency per dollar-P equals the domestic price level-eP is the amount of foreign currency obtained by not buying the U.S.-made good-(110 yen/dollar)*$2,400 = 264,000 yen/U.S.-made computer-eP is the amount of foreign currency obtained by not buying the U.S.-made good-(110 yen/dollar)*$2,400 = 264,000 yen/U.S.-made computer- P f equals the foreign price level-Divide by P f to find number of foreign goods-(264,000 yen/U.S.-made computer)/(211,200 yen/Japanese computer) = 1.25 foreign computers/U.S. computer-Real Exchange Rate = e P / P f-Number of foreign goods that can be purchased instead of one domestic good-The opportunity cost of purchasing one domestic
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