CLASS NOTES FOR ECONOMICS 252/NOV29

DR. WILLIAM SHINGLETON

INTERNATIONAL FINANCE CH 36

EXCHANGE RATE/ FOREIGN-EXCHANGE RATE

SOURCE: http://www.federalreserve.gov/releases/h10/update/

DEFINE/EXPLAIN

PRICE OF ONE CURRENCY IN UNITS OF ANOTHER

EXAMPLES/26NOV05 UPDATE DATA

118.8 YEN = 1 US DOLLAR

FROM 102.6 LAST YEAR

1 EURO = 1.18 US DOLLARS

FROM 1.32 LAST YEAR

INTERNATIONAL DOLLAR MARKET

ALTERNATIVES

CLEAN FLOAT

APPRECIATION

DEPRECIATION

DIRTY FLOAT/FLEXIBLE RATE

“STRONG AND STABLE”

FIXED RATE

FLOATING RATES

FOREIGN EXCHANGE MARKET/DOLLARS

DEMAND FOR US DOLLARS

US EXPORTS

INVESTING IN THE US

FOREIGN FUNDS ATTRACTED BY

U.S. ACCOUNTING STANDARDS

U.S. TAX RATES

U.S. GROWTH

U.S. POLITICAL STABILITY

INTERNATIONAL CURRENCY

DOLLAR'S INCREASED VALUE

DOLLARIZED FOREIGN SYSTEMS

ECUADOR(2000) PANAMA(1904)

DRUG TRADE CURRENCY

RESERVE CURRENCY/IMF REPORT 24JAN2005

63 PCT IN US DOLLARS

$3.5 T IN TOTAL DOLLAR RESERVES

19 PCT IN EUROS

SUPPLY OF DOLLARS

US IMPORTS

INVESTING IN THE WORLD

FIXED RATES/DIRTY FLOAT

SUPPLY AND DEMAND

INTERVENTION

LIMITED BY AMOUNT OF RESERVES

MEXICO, SOUTH KOREA, ARGENTINA

U.S. LAST INTERVENED IN SEP00

REVALUATION

DEVALUATION

ROLE OF I.M.F.

INTERNATIONAL CAPITAL FLOWS

CAPITAL SURPLUS 2004.3 2004.4 2005.1 2005.2/NET DATA

119 B DIRECT INVESTMENT

94 B TREASURIES

437 B OTHER FINANCIAL INVESTMENT

13 B DOLLARS

UPDATE DATA/BEA

RELATE TO TRADE FLOWS /USE BEA DATA

618 B IN 2004

NEGATIVE STARTING IN 1976

SOURCE: http://www.census.gov/foreign-trade/statistics/historical/index.html

TRADE DEFICIT MUST BE PAID FOR

MOST COUNTRIES SETTLE IN U.S. DOLLARS

CAN OFFSET FED POLICY

CAPITAL RESPONDS TO INTEREST RATES

TRADE DEFICIT DRAINS FUNDS FROM U.S. SYSTEM

AFFECTS U.S. MONEY SUPPLY => INTEREST RATES

SHOW AGGREGATE DEMAND EFFECT

WHAT AFFECTS THE EXCHANGE RATE

EFFECTS OF CHANGES IN

INCOME

INFLATION

INTEREST RATES

EFFECTS OF CHANGES IN THE EXCHANGEE RATE ON

IMPORTS

EXPORTS

BALANCE OF TRADE

INVESTMENT

PRICES/INFLATION

GLOBALIZATION (CHAPTER 18)

EFFEC OF IMPORTS

LEAKAGE

REDUCE THE SIZE OF THE MULTIPLIER

ALLOWS DOMESTIC SPENDING TO EXCEED PRODUCTION

TRADE DEFICIT

AGGREGATE DEMAND/AGGREGATE SUPPLY

SYMTOM OR CAUSE?

EFFECT ON ON EXCHANGE RATE => DEPRECIATION

EFFECT ON PRODUCTIVITY

SPECIALIZATION

INSTITUTIONS

INTERNATIONAL MONETARY FUND (IMF)

FIRST AID FOR PROBLEMS

ROLLING OVER PROBLEMS

WORLD BANK

LOW COST INVESTMENTS

FOR PROBLEM COUNTRIES

GROUP OF SEVEN (OR EIGHT)

POLICY CO-ORDINATION