国际贸易双语教案问题答案

CHAPTER 19

WHAT DETERMINES EXCHANGE RATES?

Objectives of the Chapter

In the short run, fluctuations in exchange rates can be related to demands for and supplies of assets denominated in different currencies—what we call “the asset market approach to exchange rates.” Here, we revisit the international financial investors and incorporate the impact of interest rate differentials and exchange rate expectations into the determination of the current spot exchange rate.

In the long run, purchasing power parity suggests that movements in exchange rates are determined by differences in countries’ inflation rates. The “monetary approach to exchange rates” explains inflation rates as functions of relative demands for and supplies of domestic and foreign monies. Linking the two, we get a model that ties exchange rates to “fundamentals” such as incomes and relative money supplies. After studying Chapter 19 you should be able to explain

1. the impact of interest rates on the current exchange rate.

2. the impact of expectations about future spot rates on the current exchange rate.

3. what exchange rate overshooting is, and why it can occur.

4. how short-run exchange rate movements can diverge from what would be predicted by market

fundamentals.

5. the purchasing power parity hypothesis, in both its absolute and relative forms.

6. the quantity theory of money in a two-country world.

7. the difference between nominal and real exchange rates.

Important Concepts

Asset market approach Explains exchange rates in terms of demands and supplies to exchange rates: of all assets denominated in different currencies. The monetary

approach to exchange rates is a variant of this approach in which

only demands and supplies of the money asset are considered. Bandwagon: A situation in which investors expect the recent trend in exchange

rates to extend into the future.

Law of one price:Asserts that a single commodity will have the same price everywhere

once the prices are expressed in the same currency. This is another

way of stating the purchasing power parity hypothesis. It seems to be

true chiefly for commodities that are standardized and heavily traded

internationally.

Monetary approach Seeks to explain exchange rates by focusing on the demands to exchange rates: for and supplies of national monies.

Nominal bilateral exchange rate: The exchange rate we see quoted in foreign exchange markets.

Nominal effective exchange rate: The weighted-average exchange value of a country’s currency,

where the weights reflect the importance of the other countries in

t he home country’s total international trade.

Overshooting: When the exchange rate is driven past its ultimate equilibrium rate

(usually thought to be the PPP level), and then back to that rate later,

during the adjustment of the macroeconomy to an exogenous shock.

This effect is the consequence of goods prices that are sticky in the

short run.

Purchasing power parity: In its absolute form, this hypothesis says that the exchange rate will

equal the ratio of the domestic price level to the foreign price level,

or e= P/P f. (In its relative form, the hypothesis states that the

difference over time in inflation rates will be offset by changes in

the exchange rate over that period)] An approximation of relative

purchasing power parity is [e future–e today]= [(inflation rate at home)

minus (inflation rate in the foreign country]).

Quantity theory Theorizes that, in any country, the money supply is equal to the of money: demand for money, which is directly proportional to the value of

nominal gross domestic product. This is symbolized as M = kPY.

Here, money’s only role is as a medium of exchange.

Real exchange rate: A way of measuring the price of foreign goods, not just in currency-

adjusted terms, but also in price-level-adjusted terms. The real

exchange rate on a currency at any moment in time is calculated as:

[(foreign cost of home currency) x (P/P f) x (100)]. If purchasing

power parity holds between the two countries, the real exchange rate

will be 100. When the real exchange rate is above 100, the home

currency is overvalued and the foreign currency is undervalued;

when the real exchange rate is less than 100, the home currency is

undervalued and the foreign currency is overvalued.

Speculative bubble: A self-confirming upward or downward movement in a price (here,

the exchange rate) that is out of line with the changes in the

fundamental factors that determine the price of that object.

Warm-up Questions

True or False? Explain.

1. T / F An expectation that the yen will appreciate can cause the yen to appreciate.

2. T / F An increase in the domestic interest rate will cause the home currency to depreciate.

3. T / F International interest rate differentials drive exchange rates in the short run; international

price differentials drive exchange rates in the long run.

4. T / F The purchasing power parity hypothesis is unlikely to be true for countries that do not

trade commodities internationally.

5. T / F If the inflation rate in the United States is lower than the inflation rate in France, the euro

will depreciate relative to the dollar.