(BQ) Part 2 book “International economics” has contents: Money, interest rates, and exchange rates, output and the exchange rate in the short run, fixed exchange rates and foreign exchange intervention, optimum currency areas and the euro, price levels and the exchange rate in the long run, and other contents. | CHAPTER 14 Exchange Rates and the Foreign Exchange Market: An Asset Approach O ver the seven years between mid-2007 and mid-2014, the . dollar’s price against a basket of major foreign currencies remained roughly constant (despite a temporary rise in the spring of 2009). In the year and a half between mid-2014 and the start of 2016, however, the dollar’s value suddenly rose by a whopping 25 percent. What changes in the . and world economy could possibly have driven such a dramatic change in the foreign exchange market? In this chapter we will begin our study of the causes and effects of exchange rate changes. The price of one currency in terms of another is called an exchange rate. At 4 . London time on January 19, 2017 you would have needed dollars to buy one unit of the European currency, the euro, so the dollar’s exchange rate against the euro was $ per euro. Because of their strong influence on the current account and other macroeconomic variables, exchange rates are among the most important prices in an open economy. Because an exchange rate, the price of one country’s money in terms of another’s, is also an asset price, the principles governing the behavior of other asset prices also govern the behavior of exchange rates. As you will recall from Chapter 13, the defining characteristic of an asset is that it is a form of wealth, a way of transferring purchasing power from the present into the future. The price an asset commands today is therefore directly related to the purchasing power over goods and services that buyers expect it to yield in the future. Similarly, today’s dollar/euro exchange rate is closely tied to people’s expectations about the future level of that rate. Just as the price of Google stock rises immediately upon favorable news about Google’s future prospects, so do exchange rates respond immediately to any news concerning future currency values. Our general goals in this chapter are to understand the role of .
