Please enable JavaScript.
Coggle requires JavaScript to display documents.
Macroeconomy (Lecture 9) Exchange Rates and Policy in Open Economies…
Macroeconomy (Lecture 9) Exchange Rates and Policy in Open Economies
Exchange rates and competitiveness
The nominal exchange rate
Nominal exchange rate = rate at which a currency trades for another
Two types of quotation:
E is the exchange rate of the euro/dollar: price of the foreign currency (dollar) in units of the domestic currency (euro)
1 $ = E €
E increases means euro depreciates (it takes more euros to buy one dollar)
E is the price of the domestic currency (euro) in units of the foreign currency (dollar)
1 € = E $
We use mostly the first convertion : when E increases, the euro depreciates
Floating and fixed exchange rate regimes
Floating
The exchange rate is determined on foreign exchange rate markets without interventions of central banks (euro/dollar)
Fixed
Central banks intervene on markets to maintain the exchange rate at an announced level or around such a level (Gold standard at the end of 19th century, FF/DM, Bretton Woods system until 1971, certain developing and emerging countries)
Many intermediate situations
Price conversion
P US= price of US goods in dollar
E is the exchange rate (number of euros to buy one $)
(P US)€ = price of US goods converted in euro
(P US)€= E X P US
Remark: A depreciation of the euro (E /^)
Increases the price in euro of US goods (if the producer price P US dos not change)
Decreases the price in $ of European goods (if the producer price in euro does not change).)