1. Quantitative Easing
Why does Mr. Klein choose to pay
$3.30 per gallon to fill up his car, when
he could drive 10 miles to fill up for
$3.15 per gallon?

2. XE.com Short Quiz
1. Which currency is strongest against the others?
2. Which currency is the weakest?
3. If Klein wants to spend 6100 peso for a fabulous weekend in
Cabo San Lucas, how much money is that in dollars?
4. Draw the change the US $ if the Fed increases the discount
rate to 5%.

3. “Crowding Out effect”

6. What happens to the US $ if?
• US firms increase direct
investment in a poor country such
as Guatemala?
• Loanable funds in US S or D?
• What happens to NCO?
• How does that effect the US $
exchange rate in the Forex
market?

7. International Currency Exchanges

8. International Currency markets
• Flexible exchanges
• “floating”
• Based on S & D
• Fixed exchanges
• Set by central banks
• “pegged” to another currency
• Not too popular any more
Advantages and
disadvantages of
each

9. Flexible Exchange Rates
• Appreciate = stronger against…
• Depreciate = weaker against…
• Stronger:
• Weaker:

10. Nominal vs. Real
Exchange rate
• Nominal exchange rate
• The tradable rate of exchange
• For example 12 Pesos = 1 $, or $0.082 for 1 Peso
• But that’s not the real rate since fiat money’s value
based on purchasing power
• If I go to Mexico, will X really be the same price?
• So: Real Exchange rate is:
• Nominal X Domestic price / foreign price (in local
currency)
• Students going to dentist? Other examples?

11. In the long run though…..
• People adjust purchases and exchange rates
balance out so we get
• Cigarettes for a while in the 90s
• Purchasing power parity (PPP)
• Goods should have the same prices in different
countries after currency exchange
• Burgernomics
?
?

15. $ to Euros

16. Who gains? Who “loses”?

24. Mankiw questions
Page 691 Problem #1,6, 8, 9, 10,11