1. Overview Chapters 12-17

2. Ch. 12: Int. Fin. Markets Currency Trading -> Exchange Rate Time lag twix ship and receive bigger than time needed for cable transfer. Solution: commercial bill of exchange Spot vs. Forward XR: risk transferred to speculators Also: Futures, Options, Swaps

3. Capital Flows To get higher return To get safer return: risk diversification SR: Money Market (maturity < 1 year) LR: Capital Market (maturity > 1 year)

4. Eurocurrency E.g., Eurodollar = $-denominated account outside the US

5. Ch. 13: XR (basic model) It’s a supply and demand thing. Demand for currency shifts with income and changing relative prices. Ditto for supply of currency

6. Ch. 14: XR (add M and i) Previous model good for long-term predictions. But other determinants matter in the shorter term: M and i. What is M? How does Supply of M work? (Reserve requirement -> multiplier) Discount rate, Open mkt ops

7. Demand for M MD=f(i,P,Y) MD=MS determines i Interest arbitrage: capital movement Affects XR, which affects Exp-Imp

8. Ch. 15: XR  PPP What are the determinants of the exchange rate over long periods of time? What effect does monetary policy have on the country’s price level and therefore its exchange rate? Is there a benchmark for the current exchange rate?

9. Ch. 15: XR  PPP arbitrage -> law of 1 price -> PPP relative PPP: RXR:

10. Ch. 16: Y and XR (SR) AD and AS (slopes) Intersection determines Y and P Foreign income affects Exp Domestic income affects Imp XR affects both Imp and Exp XR affects composition of output (tradable vs. non-tradables)

11. Ch.17: Macro Policy Internal Balance –GDP (full employment) –P (keep inflation in check) External Balance –X-M (current account balance)

12. Fiscal Policy (expansionary) (G  and/or T  )  1.direct effect: AD  and P  2.indirect effect: budget deficit  Gov. must borrow  i   attracts foreign capital (until i  back at original level)  XR  (X-M)   AD  and P  3.net effect: ambiguous! Fiscal policy now used less as a means of stabilizing the economy than 30 years ago b/c of flexible exchange rates and increased international mobility of capital.

13. Monetary Policy (expansionary) MS   i  1.direct effect: (C  and I  )  (AD  and P  ) 2.indirect effect:  outflow of capital  XR  (X- M)   (AD  and P  ) 3.net effect: clear! monetary policy is more effective than fiscal policy as a stabilization tool b/c of flexible exchange rates.