Quantitative EasingWhy 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?

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%.

“Crowding Out effect”

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?

International Currency Exchanges

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

Flexible Exchange Rates• Appreciate = stronger against…• Depreciate = weaker against…

• Stronger:

• Weaker:

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?

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

?

?

$ to Euros

Who gains? Who “loses”?

Mankiw questions

Page 691 Problem #1,6, 8, 9, 10,11