ch13 Exchange Rates and the Foreign Exchange Market An Asset Approach 克鲁格曼国际经济学第六版英文知识讲稿.pptVIP

The Equilibrium Exchange Rate Exchange rates always adjust to maintain interest parity. Assume that the dollar interest rate R$, the euro interest rate R€, and the expected future dollar/euro exchange rate Ee$/€, are all given. Equilibrium in the Foreign Exchange Market R$ Return on dollar deposits Figure 13-4: Determination of the Equilibrium Dollar/Euro Exchange Rate Rates of return (in dollar terms) Exchange rate, E$/€ E2$/€ 2 1 E1$/€ E3$/€ 3 Expected return on euro deposits Equilibrium in the Foreign Exchange Market The Effect of Changing Interest Rates on the Current Exchange Rate An increase in the interest rate paid on deposits of a currency causes that currency to appreciate against foreign currencies. A rise in dollar interest rates causes the dollar to appreciate against the euro. A rise in euro interest rates causes the dollar to depreciate against the euro. Interest Rates, Expectations, and Equilibrium Dollar return R2$ R1$ Figure 13-5: Effect of a Rise in the Dollar Interest Rate Rates of return (in dollar terms) Exchange rate, E$/€ 2 E2$/€ 1 1 E1$/€ Expected euro return Interest Rates, Expectations, and Equilibrium Dollar return R$ Figure 13-6: Effect of a Rise in the Euro Interest Rate Rates of return (in dollar terms) Exchange rate, E$/€ 1 E1$/€ 2 E2$/€ Rise in euro interest rate Expected euro return Interest Rates, Expectations, and Equilibrium The Effect of Changing Expectations on the Current Exchange Rate A rise in the expected future exchange rate causes a rise in the current exchange rate. A fall in the expected future exchange rate causes a fall in the current exchange rate. Interest Rates, Expectations, and Equilibrium Summary Exchange rates play a role in spending decisions because they enable us to translate different countries’ prices into comparable terms. A depreciation (appreciation) of a country’s currency against foreign currencies makes its exports cheaper (more expensive) and