Ppp burgernomics etc

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Ppp burgernomics etc

  1. 1. Quantitative Easing Why does Mr. Klein choose to pay $3.30 per gallon to fill up his car, when he could drive 10 miles to fill up for $3.15 per gallon?
  2. 2. XE.com Short Quiz 1. Which currency is strongest against the others? 2. Which currency is the weakest? 3. If Klein wants to spend 6100 peso for a fabulous weekend in Cabo San Lucas, how much money is that in dollars? 4. Draw the change the US $ if the Fed increases the discount rate to 5%.
  3. 3. “Crowding Out effect”
  4. 4. What happens to the US $ if? • US firms increase direct investment in a poor country such as Guatemala? • Loanable funds in US S or D? • What happens to NCO? • How does that effect the US $ exchange rate in the Forex market?
  5. 5. International Currency Exchanges
  6. 6. International Currency markets • Flexible exchanges • “floating” • Based on S & D • Fixed exchanges • Set by central banks • “pegged” to another currency • Not too popular any more Advantages and disadvantages of each
  7. 7. Flexible Exchange Rates • Appreciate = stronger against… • Depreciate = weaker against… • Stronger: • Weaker:
  8. 8. Nominal vs. Real Exchange rate • Nominal exchange rate • The tradable rate of exchange • For example 12 Pesos = 1 $, or $0.082 for 1 Peso • But that’s not the real rate since fiat money’s value based on purchasing power • If I go to Mexico, will X really be the same price? • So: Real Exchange rate is: • Nominal X Domestic price / foreign price (in local currency) • Students going to dentist? Other examples?
  9. 9. In the long run though….. • People adjust purchases and exchange rates balance out so we get • Cigarettes for a while in the 90s • Purchasing power parity (PPP) • Goods should have the same prices in different countries after currency exchange • Burgernomics ? ?
  10. 10. $ to Euros
  11. 11. Who gains? Who “loses”?
  12. 12. Mankiw questions Page 691 Problem #1,6, 8, 9, 10,11

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