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CHAPTER 2 OVERVIEW:
PART
I. EQUILIBRIUM EXCHANGE RATES II. ROLE OF CENTRAL BANKS III. EXPECTATIONS AND THE ASSET MARKET MODEL
e0 e1 e1
e1 e0 e0
e1 e0 e0
= (.68 - .64)/ .64 = 6.25%
(e0 - e1)/ e1 substituting (.64 - .68)/ .68 = - 5.88% which was the US$ depreciation.
EXPECTATIONS
II. Role of Expectations : A. Currency = financial asset B. Exchange rate = simple relation of two financial assets
EXPECTATIONS
III. Demand for Money and Currency Values: Asset Market Model A. Exchange rates reflect the
supply of and demand for foreign-currency denominated assets.
EXPECTATIONS
B. Soundness of a Nations Economic Policies
- a nations currency tends to strengthen with sound economic policies.
EXPECTATIONS
IV. EXPECTATIONS AND
CENTRAL BANK BEHAVIOR
EXPECTATIONS
A. Central Bank Reputations
B. Central Bank Independence C. Currency Boards