tailieunhanh - Ten Principles of Economics - Part 66

Ten Principles of Economics - Part 66. Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by a single central planner but through the combined actions of millions of households and firms. Economists therefore study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. Economists also study how people interact with one another. | CHAPTER 29 OPEN-ECONOMY MACROECONOMICS BASIC CONCEPTS 673 That is the nominal exchange rate equals the ratio of the foreign price level measured in units of the foreign currency to the domestic price level measured in units of the domestic currency . According to the theory of purchasing-power parity the nominal exchange rate between the currencies of two countries must reflect the different price levels in those countries. A key implication of this theory is that nominal exchange rates change when price levels change. As we saw in the preceding chapter the price level in any country adjusts to bring the quantity of money supplied and the quantity of money demanded into balance. Because the nominal exchange rate depends on the price levels it also depends on the money supply and money demand in each country. When a central bank in any country increases the money supply and causes the price level to rise it also causes that country s currency to depreciate relative to other currencies in the world. In other words when the central bank prints large quantities of money that money loses value both in terms of the goods and services it can buy and in terms of the amount of other currencies it can buy. We can now answer the question that began this section Why has the . dollar lost value compared to the German mark and gained value compared to the Italian lira The answer is that Germany has pursued a less inflationary monetary policy than the United States and Italy has pursued a more inflationary monetary policy. From 1970 to 1998 inflation in the United States was percent per year. By contrast inflation was percent in Germany and percent in Italy. As . prices rose relative to German prices the value of the dollar fell relative to the mark. Similarly as . prices fell relative to Italian prices the value of the dollar rose relative to the lira. CASE STUDY THE NOMINAL EXCHANGE RATE DURING A HYPERINFLATION Macroeconomists can only rarely conduct .

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