Macroeconomic Equilibrium and Exchange Rates

Macroeconomic equilibrium

Point equilibrium at market aggregate

Balance of payments

Determination of exchange rates

AD curve

AS curve

Price level GDP

Current Account

Capital Account

Financial Account

The Purchasing Power Parity Approach

The balance of payments and the Internal-External Balance Approach

The Monetary Approach

Right

Left

Increase

Moves

Consumption

spending

Fall

spending

Left

Right

Invesment

Govermment

Export

Consumption

Invesment

Govermment

Export

+ Production

Increases productivity

- Pricing of key inputs

- Inflation

- Uemployment

+ price of key inputs

-production

+ unemployment

+ inflation

Net exports

if there is

Export

Imports

Superavit

Deficit

is

is

Record of all international commercial and financial transactions

is

Investments

External debt

Increase

if

Deficit

Superavit

Decreases

Transfer to families

Goverments

Increase

if

Decreases

Deficit

Superavit

The Portfolio Balance Approach

Interest Rate Parity

Exchange rates = relative purchasing power of currencies

Commercial restrictions

Identical goods

Is based

Tradeable goods

Information gaps

Taxes

Changes

Real exchange rates

Booms.

Productivity growth

Advances in technology

changes in the supply of factors

Changes in the market structure

Commodity shocks

Shortage

Exchange rates

Balance demand and supply

Increase in money supply

Decrease in interest rate

Currency depreciation

+ Exports

- Imports

Improves the trade balance

Balance

Total supply demand

Total national currency

In each nation.

Controlled money supply

Monetary authorities nation

Linked

Interest rate

+Interest rate

Measure of supply flow or demand for foreign exchange.

Lower risk in exchange and interest rates

A carry trade buy

High interest rate Sell

Moving funds to higher-yielding currencies

Riskier currencies

Have current account deficits

Current account

Current account

Transfers

Trade in goods and services

Investment income

Purchases of bonds and stocks

Direct investment activities.

Moves

is

The model of

Tend to depreciate.

Causes depreciation

- demand for money.