ch15 Price Levels and the Exchange Rate in the Long Run 国际商务硕士 国际经济学 教学课件.pptVIP

Chapter 15 Price Levels and the Exchange Rate in the Long Run Preview Law of one price Purchasing power parity Long run model of exchange rates: monetary approach Relationship between interest rates and inflation: Fisher effect Shortcomings of purchasing power parity Long run model of exchange rates: real exchange rate approach Real interest rates The Behavior of Exchange Rates What models can predict how exchange rates behave? In last chapter we developed a short run model and a long run model that used movements in the money supply. In this chapter, we develop 2 more models, building on the long run approach from last chapter. Long run means a sufficient amount of time for prices of all goods and services to adjust to market conditions so that their markets and the money market are in equilibrium. Because prices are allowed to change, they will influence interest rates and exchange rates in the long run models. The Behavior of Exchange Rates (cont.) The long run models are not intended to be completely realistic descriptions about how exchange rates behave, but ways of representing how market participants may form expectations about future exchange rates and how exchange rates tend to move over long periods. Law of One Price The law of one price simply says that the same good in different competitive markets must sell for the same price, when transportation costs and barriers between those markets are not important. Why? Suppose the price of pizza at one restaurant is $20, while the price of the same pizza at an identical restaurant across the street is $40. What do you predict to happen? Many people would buy the $20 pizza, few would buy the $40 one. Law of One Price (cont.) Due to the price difference, entrepreneurs would have an incentive to buy pizza at the cheap location and sell it at the expensive location for an easy profit. Due to strong demand and decreased supply, the price of the $20 pizza would tend to increase. Due to weak demand and increase