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Monetary Policy, Money, International Trade, and the Exchange Rate

Monetary Policy, Money, International Trade, and the Exchange Rate. Shahzad Ahmad Uzair Akhtar Connor Dickson. Money. Without money, we use bartering. Functions of Money : Medium of exchange Unit of account Store of value. Stocks - claim ownership of the firm

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Monetary Policy, Money, International Trade, and the Exchange Rate

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  1. Monetary Policy, Money, International Trade, and the Exchange Rate Shahzad Ahmad Uzair Akhtar Connor Dickson

  2. Money Without money, we use bartering • Functions of Money: • Medium ofexchange • Unit of account • Store of value • Stocks - claim ownership of the firm • Bonds- debt financing; they borrow money and have interest payments • FV = PV(1+r) • Future Value= Present Value * (1 + interest rate)

  3. Money M2: - M1 plus near-monies - Savings deposits, MMDA, MMMF - Small time deposits Money Supply is measured by the central bank as M1, M2, and M3 M1: - Currency • -Checkable Deposits • -most liquid money M3: - Large time deposits

  4. Monetary Policy Contractionary: - AD shifts left- Sell bonds - Increase interest rate - Increase reserve ratio Expansionary: - AD shifts right - Buy bonds - Decrease interest rate - Decrease reserve ratio • Open Market Operations (OMO) - deal with the buying and selling of government bonds and securities

  5. Exchange Rate Foreign governmentscontrol the supply of foreign currency. Demand for foreign currency appreciates because of increases in travel, trade, and investment.

  6. Exchange Rates example Assume the Japanese Yen depreciates… • Japanese exports to the US increase • US dollar appreciates (increases in value) • US exports to Japan decrease

  7. International Trade Countries base their decision on which country to trade with based on Comparative Advantage and Absolute Advantage. Comparative Advantage is defined as the ability to produce a good at lower opportunity cost than all other producers. Absolute Advantage is defined as the ability to produce more of a good than all other producers.

  8. International Trade • Barriers to Trade: • Tariff – a tax on imports into a country or exports out of a country • Quota– a limit on the quantity or value of imports or exports set by the government • Balance of payments statement – tracks the flow of payments received and payments given.

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