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For more information, please see full course syllabus of AP Macroeconomics
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Lecture Comments (4)

1 answer

Last reply by: Professor Jibin Park
Wed Jun 24, 2015 9:52 PM

Post by Anna Ha on June 24, 2015

Hi Professor Jibin Park,

Thank you for your informative lectures! They have been extremely helpful!
I'm living in Australia and I'm not sure how all the exchange rate works.

Usually we compare 1AUD to USD. So if you say the exchange rate is high, is that saying 1AUD > USD or 1AUD < USD?? How would the exchange rate affect net exports and aggregate expenditure? I know that higher ER leads to higher AE but I'm sure why...

Thank you!!

1 answer

Last reply by: Professor Jibin Park
Mon May 4, 2015 3:54 PM

Post by Kim Gyu Min on May 4, 2015

Is Korea using Fixed exchange rate? (The bank of Korea has 5th or 4th largest quantity of dollar in their banks.not really sure about the ranking)

In recent days Won is appreciated while dollar is depreciated could this phenomenon come from where The bank of Korea is holding more dollars and buying national bond is US?(We all know Fed will raise the interest rate some month this year, because Fed chairman said so)

Foreign Exchange Market

  • Stuff produced in a country will be paid for in that country’s currency
  • An appreciating currency will decrease exports and thus decrease GDP
  • A depreciating currency will increase exports and thus increase GDP
  • The real exchange rate takes into account inflation in both countries
  • Purchasing Power Parity is the nominal exchange rate at which a given basket of goods and services would cost in each country
  • The Big Mac Index is a simplistic but effective way of measuring purchasing power parity
  • A fixed exchange rate occurs when the government keeps the exchange rate against some other currency at or near a particular target
  • A floating exchange rate occurs when the exchange rate is wherever the free market takes it

Foreign Exchange Market

Lecture Slides are screen-captured images of important points in the lecture. Students can download and print out these lecture slide images to do practice problems as well as take notes while watching the lecture.

  • Intro 0:00
  • Lesson Overview 0:06
  • Understanding Exchange Rates 1:19
    • Items Produced in a Country Will be Paid for In That Country's Currency
    • Foreign Exchange Market
  • The Foreign Exchange Market: Dollar Example 5:33
  • The Foreign Exchange Market: Euro Example 9:44
  • Inflation and Real Exchange Rates 15:34
    • Real Exchange Rates
    • Current Account Responds Only to Changes in the Real Exchange Rate
  • Purchasing Power Parity 18:02
    • Concept for Analyzing Interest Rates
    • Purchasing Power Parity Between Two Countries Currencies
    • In Theory, You 'Should' Be Able to Buy $100 Worth of Stuff in Any Country
  • Burgernomics 21:03
    • Big Mac Index
    • Not the Best Measure
    • U.S. Cost of Big Macs
    • Overvalued Big Macs
    • Undervalued Big Macs
    • Chart: Buns For Your Buck
  • Floating vs. Fixed Exchange Rate Regime 26:31
    • Fixed Exchange Rate
    • Floating Exchange Rate
  • Exchange Rate Dilemma 29:40
    • Fixed Rate Regimes Give Predictability to Trade
    • Every Choice Has a Cost
  • Example 1 32:21
  • Example 2 33:55
  • Example 3 35:25
  • Example 4 37:30