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ModuleThe ForeignExchangeMarket
KRUGMAN'SMACROECONOMICS for AP*
42
Margaret Ray and David Anderson
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What you will learnWhat you will learn
in thisin this ModuleModule::
• The role of the foreign exchange market and the exchange rate
• The importance of real exchange rates and their role in the current account
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Understanding Exchange RatesUnderstanding Exchange Rates
•Foreign Exchange Market
•Exchange Rates
•Appreciate
•Depreciate
US $ JP ¥ €
$1.00 1 94.2 0.7479
¥1 0.0106 1 .0079
€1.00 1.337 125.6 1
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The Equilibrium Exchange RateThe Equilibrium Exchange Rate
• FOREX follows laws of supply & demand
•Equilibrium Exchange Rate
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Inflation and Real ExchangeInflation and Real Exchange Rates Rates
•Real Exchange Rates
•Nominal Exchange Rates
•Real Exchange Rate and the Current Account
Current Account - The difference between a nation's total exports of goods, services and transfers, and
its total imports of them.
Current Account - The difference between a nation's total exports of goods, services and transfers, and
its total imports of them.
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Purchasing Power ParityPurchasing Power Parity
•Purchasing Power Parity (PPP)
•Big Mac Index
•Nominal Exchange Rates and PPP
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Table 42.1 Exchange Rates, April 30, 2010, 9:40 A.M.Ray and Anderson: Krugman’s Macroeconomics for AP, First
EditionCopyright © 2011 by Worth Publishers
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Figure 42.1 The Foreign Exchange MarketRay and Anderson: Krugman’s Macroeconomics for AP, First
EditionCopyright © 2011 by Worth Publishers
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Table 42.2 Equilibrium in the Foreign Exchange Market: A Hypothetical Example
Ray and Anderson: Krugman’s Macroeconomics for AP, First EditionCopyright © 2011 by Worth Publishers
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Figure 42.2 An Increase in the Demand for U.S. DollarsRay and Anderson: Krugman’s Macroeconomics for AP, First Edition
Copyright © 2011 by Worth Publishers
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Table 42.3 Effects of Increased Capital InflowsRay and Anderson: Krugman’s Macroeconomics for AP,
First EditionCopyright © 2011 by Worth Publishers
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Figure 42.3 Real versus Nominal Exchange Rates, 1990–2009
Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition
Copyright © 2011 by Worth Publishers
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Figure 42.4 Purchasing Power Parity versus the Nominal Exchange Rate, 1990–2008
Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition
Copyright © 2011 by Worth Publishers
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Unnumbered Figure 42.1 Low-Cost AmericaRay and Anderson: Krugman’s Macroeconomics for AP, First
EditionCopyright © 2011 by Worth Publishers