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AP Economics

AP Economics. Mr. Bernstein Module 42: The Foreign Exchange Market April 23, 2014. AP Economics Mr. Bernstein. The Foreign Exchange Market Objectives - Understand each of the following: The role of the Foreign Exchange market and the exchange rate

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AP Economics

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  1. AP Economics Mr. Bernstein Module 42: The Foreign Exchange Market April 23, 2014

  2. AP EconomicsMr. Bernstein The Foreign Exchange Market Objectives - Understand each of the following: • The role of the Foreign Exchange market and the exchange rate • The importance of real exchange rates and their role in the current account

  3. AP EconomicsMr. Bernstein Exchange Rates • Loanable Funds Market models flow of financial assets into and out of the Capital Account…and… • Goods and Services flow into and out of the Current Account • The Exchange Rate insures Current Account minus Capital Account = 0 • Currencies appreciate and depreciate vs. one another

  4. AP EconomicsMr. Bernstein Equilibrium Exchange Rates • FX rate is really just a price • Follows Laws of Supply and Demand • Labeling: think “bottom/bottom” • D slopes downward: Lower USD makes US products more attractive to Europeans

  5. AP EconomicsMr. Bernstein Inflation and Real Exchange Rates • Example: Real Mexican Peso Exchange Rate = MXN/USD FX rate * (CPIMEX / CPIUSA) • Economists may refer to nominal and real exchange rates

  6. AP EconomicsMr. Bernstein Purchasing Power Parity • PPP = Exchange rate where basket of goods and services would cost the same in each country • Example: Basket of goods and services in US costs $100 and in Mexico costs MXN1,000. PPP = 10 MXN per USD

  7. AP EconomicsMr. Bernstein FX rates as of 4/20/14

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