Chapter 14 Money, Interest Rates, and Exchange Rates Prepared by Iordanis Petsas To Accompany International Economics: Theory and Policy International Economics: Theory and Policy, Sixth Edition by Paul R. Krugman and Maurice Obstfeld

Slide 14-2Copyright © 2003 Pearson Education, Inc.  Introduction  Money Defined: A Brief Review  The Demand for Money by Individuals  Aggregate Money Demand  The Equilibrium Interest Rate: The Interaction of Money Supply and Demand Chapter Organization

Slide 14-3Copyright © 2003 Pearson Education, Inc.  The Money Supply and the Exchange Rate in the Short Run  Money, the Price Level, and the Exchange Rate in the Long Run  Inflation and Exchange Rate Dynamics  Summary Chapter Organization

Slide 14-4Copyright © 2003 Pearson Education, Inc. Introduction  CH13 showed how the exchange rate between currencies depends on two factors, the interest that can be earned on deposits of those currencies and the expected future exchange rate.  How interest rate themselves are determined? The equilibrium interest rates are determined by the equality of money supply and money demand.

Slide 14-5Copyright © 2003 Pearson Education, Inc. Introduction  Factors that affect a country’s money supply or demand are among the most powerful determinants of its currency’s exchange rate against foreign currencies.  This chapter combines the foreign-exchange market with the money market to determine the exchange rate in the short run.  Finally, it analyzes the long-term effects of monetary changes on output prices and expected future exchange rates.

Slide 14-6Copyright © 2003 Pearson Education, Inc.  模型目的。  內生變數：決定模型兩軸。  行為法則：畫出模型曲線。  均衡：決定均衡之內生變數。  外生衝擊 判斷是否為外生變數改變？ 判斷此外生變數之改變將影響哪些行為法則？ 判斷此外生變數之改變造成行為法則何種影響？ 學習經濟模型五步驟  模型目的。

Slide 14-7Copyright © 2003 Pearson Education, Inc. Money Defined: A Brief Review  The characteristics of money that lead people to held it: Money as a Medium of Exchange –A generally accepted means of payment Money as a Unit of Account –A widely recognized measure of value Money as a Store of Value –Because money can be used to transfer of purchasing power from the present into the future, it is also an asset, or a store of value.

Slide 14-8Copyright © 2003 Pearson Education, Inc.  What Is Money? Assets widely used and accepted as a means of payment. Money is very liquid, but pays little or no return. –All other assets are less liquid but pay higher return. Money Supply M 1 = Currency + Checking Deposits Currency pays no interest. Checking deposits pays little interest. The difference in rates of return between money in general and les-liquid alternative assets is reflected by the market interest rate:the higher the interest rate the more you sacrifice by holding wealth in the form of money. Money Defined: A Brief Review

Slide 14-9Copyright © 2003 Pearson Education, Inc.  模型目的。  內生變數：決定模型兩軸。  行為法則：畫出模型曲線。  均衡：決定均衡之內生變數。  外生衝擊 判斷是否為外生變數改變？ 判斷此外生變數之改變將影響哪些行為法則？ 判斷此外生變數之改變造成行為法則何種影響？ 學習經濟模型五步驟  內生變數

Slide 14-10Copyright © 2003 Pearson Education, Inc. 內生變數 Interest rate, R Real money holdings

Slide 14-11Copyright © 2003 Pearson Education, Inc.  模型目的。  內生變數：決定模型兩軸。  行為法則：畫出模型曲線。  均衡：決定均衡之內生變數。  外生衝擊 判斷是否為外生變數改變？ 判斷此外生變數之改變將影響哪些行為法則？ 判斷此外生變數之改變造成行為法則何種影響？ 學習經濟模型五步驟  行為法則

Slide 14-12Copyright © 2003 Pearson Education, Inc.  How the Money Supply Is Determined An economy’s money supply is controlled by its central bank. –The central bank: –Directly regulates the amount of currency in existence –Indirectly controls the amount of checking deposits issued by private banks Money Defined: A Brief Review

Slide 14-13Copyright © 2003 Pearson Education, Inc. Money Defined: A Brief Review Interest rate, R Real money holdings Real money supply M S P R1R1 R2R2