The document discusses various concepts related to international currency exchanges and quantitative easing including flexible versus fixed exchange rates, the crowding out effect on loanable funds and impacts on the US dollar from changes in direct investment abroad or monetary policy. It also addresses nominal versus real exchange rates and the concept of purchasing power parity in currency markets over the long run.

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. 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. “Crowding Out effect”

6. 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?

7. International Currency Exchanges

8. 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

9. Flexible Exchange Rates
• Appreciate = stronger against…
• Depreciate = weaker against…
• Stronger:
• Weaker:

10. 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?

11. 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
?
?

15. $ to Euros

16. Who gains? Who “loses”?

24. Mankiw questions
Page 691 Problem #1,6, 8, 9, 10,11