Transcript Document

Exchange Rates and
Macroeconomic Policy
ECONOMICS: Principles and Applications 3e
HALL & LIEBERMAN
© 2005 Thomson Business and Professional Publishing
Table 1 Foreign Exchange Rates,
August 8, 2003
The Demand for Pounds Curve
Price of
pounds
British
goods
cheaper to
Americans
Americans
buy more
British
goods
Quantity
of pounds
demanded
Figure 1a The Demand for
British Pounds
(a)
Dollars
per Pound
$2.25
A
A drop in the price of the pound
moves us rightward along
demand for pounds curve
E
1.50
D£
200
300
Millions of
British Pounds
Figure 1b The Demand for
British Pounds
(b)
Dollars
per Pound
The demand for pounds curve shifts
rightward when:
• U.S. real GDP ↑
• U.S. relative price level ↑
• U.S. tastes shift toward British goods
• U.S. interest rate ↓
• Pound is expected to appreciate
D1£
D2£
Millions of
British Pounds
The Supply of Pounds Curve
Price of
pounds
U.S. goods
goods
cheaper to
British
British
buy more
U.S.
goods
British
need
more
dollars
Quantity
of pounds
supplied
Figure 2a The Supply of British
Pounds
(a)
Dollars
per Pound
S£
F
$2.25
1.50
E
300
A rise in the price of
the pound moves us
rightward along supply
of pounds curve
400
Millions of
British Pounds
Figure 2b The Supply of British
Pounds
(b)
Dollars
per Pound
The supply of pounds curve shifts rightward if:
• British real GDP↑
• U.S. relative price level↓
• British tastes shift toward U.S. goods
• U.S. interest rate↑
• Pound is expected to depreciate
S1£
S2£
Millions of
British Pounds
Figure 3 The Equilibrium
Exchange Rate
Dollars
per Pound
S£
Dollars
per Pound
S£
C
$2.00
E
$1.50
Equilibrium in
the market
for pounds
1.50
Higher U.S. real
GDP leads to a
higher price per
pound
E
D2£
D1£
D£
300
Millions
of British
Pounds
300
Millions
of British
Pounds
Figure 4 Hypothetical Exchange
Rate Data Over Time
Dollars per Unit of
Foreign Currency
B
A
E
C
Years
Figure 5 Hot Money in the Very
Short Run
S1£
Dollars
per Pound
$1.50
1.00
S2£
E
G
D1£
D2£
Q1 Q2
Millions of British
Pounds per Month
Figure 6 Exchange Rates in the
Short Run
(a)
(b)
Dollars
per Pound
S£
$1.80
1.50
S1£
Dollars
per Pound
$1.80
B
A
1.50
S2£
B
C
D2£
D2£
D1£
Millions
of British
Pounds
per month
D1£
Millions
of British
Pounds
per month
Figure 7a A Fixed Exchange
Rate for the Baht
(a)
Dollars per Baht
2. Here the supply and demand
curves show the equilibrium
exchange rate is $.06 per baht.
Sbaht
$0.06
Excess Demand
0.04
1. In both panels,
Thailand fixes the
exchange rate at
$.04 per baht.
0.02
3. Thai Central Bank must sell
300 million baht to keep the
baht from appreciating.
100
Dbaht
400
Millions of Baht
per Month
Figure 7 A Fixed Exchange Rate
for the Baht
(b)
Dollars per Baht
$0.06
4. With these supply and
demand curves, the
equilibrium exchange
rate is $.02 per baht.
5. Thai Central Bank must buy
300 million baht to keep the
baht from depreciating
Sbaht
Excess Supply
0.04
0.02
Dbaht
100
400
Millions of Baht
per Month
Figure 8 A Foreign Currency Crisis
Dollars per Baht
S1baht
S2baht
A
$0.04
0.02
D1baht
B
D2baht
100
400
Millions of Baht
per Month
Exchange Rates and Monetary
Policy
Money
supply
Interest
rate
a and
IP
Real
GDP
U.S.
assets
less
attractive
Decreased
supply and
increased
demand for
foreign
currency
Dollar
depreciates
Net
exports
Net Effect: GDP  by more when exchange rate’s effect on
net exports is included
Figure 9 Net Financial Flows into the
United States as a Percent of GDP
Net Financial
Inflow
(Percent of GDP) 4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
Figure 10 How a U.S. Financial
Inflow Creates a U.S. Trade Deficit
Dollars per Yen
S1¥
S2¥
A
$0.015
0.010
C
Japanese purchases
of U.S. Assets
B
Decrease in Japan's
imports to U.S.
Increase in Japan's
exports to U.S.
D¥
10,000
15,000
12,000
Billions of
Yen per Year
Figure 11 The Growing U.S.
Trade Deficit with China
$ Billions
125
U.S. imports
from China
100
80
60
40
U.S. trade deficit
with China
U.S. exports
to China
20
Year
Source: Wayne M. Morrison, “China-U.S. Trade Issues,” Congressional Research Service, Library of Congress, Updated May 16, 2003.
Figure 12 How an Undervalued Chinese Yuan
Can Create a U.S. Trade Deficit
Dollars per Yuan
Equilibrium
value of Yuan
SYUAN
A
$0.20
0.12
C
B
Fixed value
of Yuan
DYUAN
200
Decrease in China's
imports from U.S.
Increase in China's
exports to U.S.
700
1,000
Billions of
Yuan per Year