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This 2 page Class Notes was uploaded by Hanna Notetaker on Wednesday March 4, 2015. The Class Notes belongs to CAS EC102 at Boston University taught by Watson in Spring2015. Since its upload, it has received 82 views. For similar materials see Macroeconomics in Economcs at Boston University.
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Date Created: 03/04/15
03022015 Exchange Rates 0 As they uctuate so do net exports Nominal exchange rate 0 Price of one currency in terms of another currency Number of units of foreign currency per unit of domestic currency 0 We will designate nominal exchange rate with E o What causes E to uctuate As of 2012 volume of international currency transactions was 794 Billion per day What accounts for the other 998 n Speculation 0 Buying or selling something hoping to make a pro t from something changing in price 0 People buy particular currency because they expect it to go up in value 0 Speculating that the price will go up or down a World trade in assets Important determinant is r the real interest rate a r in US goes up rel to r in the rest of the world demand for US assets goes up 0 in other words demand for denominated assets in goes up 0 in order to buy those assets you need that country s currency demand for goes up 0 price of dollar goes up 0 Real Exchange rate o Is the number of units of foreign goods per unit of domestic good Price of watch in US 100 Price of identical watch in Switzerland SF300 n Nominal exchange rate SF 15 1 0 Watch in US costs SF150 Real Exchange Rate is expressed by e n e P Domestic x E a divided by P Foreign e is the domestic price times the nominal exchange rate all divided by the foreign price a e 100 x 15SF300 150300 12 a real exchange rate is 12 Swiss watch 1 American watch e will change if n E changes
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