Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Exchange Rates and Macroeconomic Policy ECONOMICS: Principles and Applications 3e HALL & LIEBERMAN © 2005 Thomson Business and Professional Publishing Table 1 Foreign Exchange Rates, August 8, 2003 The Demand for Pounds Curve Price of pounds British goods cheaper to Americans Americans buy more British goods Quantity of pounds demanded Figure 1a The Demand for British Pounds (a) Dollars per Pound $2.25 A A drop in the price of the pound moves us rightward along demand for pounds curve E 1.50 D£ 200 300 Millions of British Pounds Figure 1b The Demand for British Pounds (b) Dollars per Pound The demand for pounds curve shifts rightward when: • U.S. real GDP ↑ • U.S. relative price level ↑ • U.S. tastes shift toward British goods • U.S. interest rate ↓ • Pound is expected to appreciate D1£ D2£ Millions of British Pounds The Supply of Pounds Curve Price of pounds U.S. goods goods cheaper to British British buy more U.S. goods British need more dollars Quantity of pounds supplied Figure 2a The Supply of British Pounds (a) Dollars per Pound S£ F $2.25 1.50 E 300 A rise in the price of the pound moves us rightward along supply of pounds curve 400 Millions of British Pounds Figure 2b The Supply of British Pounds (b) Dollars per Pound The supply of pounds curve shifts rightward if: • British real GDP↑ • U.S. relative price level↓ • British tastes shift toward U.S. goods • U.S. interest rate↑ • Pound is expected to depreciate S1£ S2£ Millions of British Pounds Figure 3 The Equilibrium Exchange Rate Dollars per Pound S£ Dollars per Pound S£ C $2.00 E $1.50 Equilibrium in the market for pounds 1.50 Higher U.S. real GDP leads to a higher price per pound E D2£ D1£ D£ 300 Millions of British Pounds 300 Millions of British Pounds Figure 4 Hypothetical Exchange Rate Data Over Time Dollars per Unit of Foreign Currency B A E C Years Figure 5 Hot Money in the Very Short Run S1£ Dollars per Pound $1.50 1.00 S2£ E G D1£ D2£ Q1 Q2 Millions of British Pounds per Month Figure 6 Exchange Rates in the Short Run (a) (b) Dollars per Pound S£ $1.80 1.50 S1£ Dollars per Pound $1.80 B A 1.50 S2£ B C D2£ D2£ D1£ Millions of British Pounds per month D1£ Millions of British Pounds per month Figure 7a A Fixed Exchange Rate for the Baht (a) Dollars per Baht 2. Here the supply and demand curves show the equilibrium exchange rate is $.06 per baht. Sbaht $0.06 Excess Demand 0.04 1. In both panels, Thailand fixes the exchange rate at $.04 per baht. 0.02 3. Thai Central Bank must sell 300 million baht to keep the baht from appreciating. 100 Dbaht 400 Millions of Baht per Month Figure 7 A Fixed Exchange Rate for the Baht (b) Dollars per Baht $0.06 4. With these supply and demand curves, the equilibrium exchange rate is $.02 per baht. 5. Thai Central Bank must buy 300 million baht to keep the baht from depreciating Sbaht Excess Supply 0.04 0.02 Dbaht 100 400 Millions of Baht per Month Figure 8 A Foreign Currency Crisis Dollars per Baht S1baht S2baht A $0.04 0.02 D1baht B D2baht 100 400 Millions of Baht per Month Exchange Rates and Monetary Policy Money supply Interest rate a and IP Real GDP U.S. assets less attractive Decreased supply and increased demand for foreign currency Dollar depreciates Net exports Net Effect: GDP by more when exchange rate’s effect on net exports is included Figure 9 Net Financial Flows into the United States as a Percent of GDP Net Financial Inflow (Percent of GDP) 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% Figure 10 How a U.S. Financial Inflow Creates a U.S. Trade Deficit Dollars per Yen S1¥ S2¥ A $0.015 0.010 C Japanese purchases of U.S. Assets B Decrease in Japan's imports to U.S. Increase in Japan's exports to U.S. D¥ 10,000 15,000 12,000 Billions of Yen per Year Figure 11 The Growing U.S. Trade Deficit with China $ Billions 125 U.S. imports from China 100 80 60 40 U.S. trade deficit with China U.S. exports to China 20 Year Source: Wayne M. Morrison, “China-U.S. Trade Issues,” Congressional Research Service, Library of Congress, Updated May 16, 2003. Figure 12 How an Undervalued Chinese Yuan Can Create a U.S. Trade Deficit Dollars per Yuan Equilibrium value of Yuan SYUAN A $0.20 0.12 C B Fixed value of Yuan DYUAN 200 Decrease in China's imports from U.S. Increase in China's exports to U.S. 700 1,000 Billions of Yuan per Year