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Chapter 34 – Open-Economy Macroeconomics – 34-2
The Role of the Exchange Rate What are the three conclusions laid out in the first 3 P’s.
1 ___________________________________________________________________________
2 ___________________________________________________________________________
3 ___________________________________________________________________________
Understanding Exchange Rates When an American company (ie, Best Buy) buys products
from Japan (ie, Play Stations), the American company must pay the Japanese company in what
currency? ____________________ In conducting this transaction, the American company
________________ Japanese Yen in the currency market and __________________ U.S.$. in
that market. This currency _________________ would result in the ____________________
of the JY and the ________________________ of the U.S.$. Movements in exchange rates
affect the relative _____________ of goods, services and assets.
The Equilibrium Exchange Rate In the currency market, the country that is importing is
_________________ their own currency and _________________ another country’s currency.
A country that is buying bonds ________________ their own currency and _______________
another country’s currency. When a country’s currency appreciates, their imports _________
and their exports fall. Now note that this next graph gets confusing. Take it one step at a time.
Draw a Foreign Exchange Market graph in which $1 = JY 107.94. Include all labels.
On this graph, show and label the effects of an increase in demand for U.S.$ by the Japanese to
purchase U.S. bonds. What is the effect of this shift on the value of JY in relation to U.S.$?
___________________________________ What will be the effect of this change in currency
valuation on the current account? ________________________________________ Now stop!
Inflation and Real Exchange Rates What is the real exchange rate? How is it calculated?
_____________________________________________________________________________
_____________________________________________________________________________
Why is the real exchange rate so much more valuable as data than the nominal exchange rate?
_____________________________________________________________________________
_____________________________________________________________________________
Purchasing Power Parity What does this economic term mean and why is it useful?
_____________________________________________________________________________
_____________________________________________________________________________
Why are price levels generally lower in developing countries than in developed countries?
_____________________________________________________________________________
How does the Big Mac index show the value of PPP as a predictor of currency movements?
_____________________________________________________________________________
_____________________________________________________________________________
How did the U.S. benefit from a week dollar starting around 2006? How did it help stabilize
the economy? _________________________________________________________________
_____________________________________________________________________________
CYU 34-2 1. a. ________________________________________________________________
b. ___________________________________________________________________________
c. ___________________________________________________________________________
2. a. _________________________________________________________________________
b. ___________________________________________________________________________
(p. 939) 6. Q1. _____________________________ Q2. ________________________________
8. a.
b.
c.
d.
9. a.
b.
10. a.__________________b.___________________c._________________d.______________
Chapter 34 – Open-Economy Macroeconomics – 34-2
The Role of the Exchange Rate What are the three conclusions laid out in the first 3 P’s.
1 ___________________________________________________________________________
2 ___________________________________________________________________________
3 ___________________________________________________________________________
Understanding Exchange Rates When an American company (ie, Best Buy) buys products
from Japan (ie, Play Stations), the American company must pay the Japanese company in what
currency? ___Japanese Yen____ In conducting this transaction, the American company
____demand____ Japanese Yen in the currency market and ____supply______ U.S.$. in that
market. This currency __exchange__ would result in the __appreciation__ of the JY and the
____depreciation____ of the U.S.$. Movements in exchange rates affect the relative
___price___ of goods, services and assets.
The Equilibrium Exchange Rate In the currency market, the country that is importing is
___supplying____ their own currency and __demanding___ another country’s currency.
A country that is buying bonds __supplies___ their own currency and ___demands____
another country’s currency. When a country’s currency appreciates, their imports __rise__
and their exports fall. Now note that this next graph gets confusing. Take it one step at a time.
Draw a Foreign Exchange Market graph in which $1 = JY 107.94. Include all labels.
On this graph, show and label the effects of an increase in demand for U.S.$ by the Japanese to
purchase U.S. bonds. What is the effect of this shift on the value of JY in relation to U.S.$?
___________________________________ What will be the effect of this change in currency
valuation on the current account? ________________________________________ Now stop!
Inflation and Real Exchange Rates What is the real exchange rate? How is it calculated?
_____________________________________________________________________________
_____________________________________________________________________________
Why is the real exchange rate so much more valuable as data than the nominal exchange rate?
_____________________________________________________________________________
_____________________________________________________________________________
Purchasing Power Parity What does this economic term mean and why is it useful?
_____________________________________________________________________________
_____________________________________________________________________________
Why are price levels generally lower in developing countries than in developed countries?
_____________________________________________________________________________
How does the Big Mac index show the value of PPP as a predictor of currency movements?
_____________________________________________________________________________
_____________________________________________________________________________
How did the U.S. benefit from a week dollar starting around 2006? How did it help stabilize
the economy? _________________________________________________________________
_____________________________________________________________________________
CYU 34-2 1. a. ________________________________________________________________
b. ___________________________________________________________________________
c. ___________________________________________________________________________
2. a. _________________________________________________________________________
b. ___________________________________________________________________________
(p. 939) 6. Q1. _____________________________ Q2. ________________________________
8. a.
b.
c.
d.
9. a.
b.
10. a.__________________b.___________________c._________________d.______________