University:
Massachusetts Institute of Technology
Course:
15.501/516 | Accounting
Academic year:

2023
Views:

461

Pages:

8
Author:

Sullivan Deleon

Agenda I. Review II. Purchasing Power Parity (PPP) III. Exchange Rates IV. Balance of Payment V. Crisis Management Review Monetary Policy -Money supply and interest rates Fiscal Policy -Government spending and taxation GDP Accounting -Consumption (Multiplier), Investment (Accelerator), Government Expenditures, Net Exports (Exports – Imports) Purchasing Power Parity (PPP) Explains the currency exchange rates between two countries using price levels: Pus= (E)(PE ) Pus= US price level E = exchange rate $/Euro PE = European price level Take away: If price level of the goods in one country becomes more expensive, the demand for that country’s currency and product will fall, causing the exchange rate to adjust until the above equation holds true again. Relative PPP The “Big Mac” Index E – E(t-1) = Inflation US – Inflation Europe E(t-1) Example 1: if US prices rises 10%, European Prices rises 3% US dollar will depreciate 7% against the euro Measure U.S. Japan Inflation Rate 5% 3% Productivity Growth 4% 1% Exchange Rates Factor in country A Change Effect on Country A’s currency Interest rate in A Increase appreciate Inflation rate in A Increase depreciate Demand for A’s goods Increase Appreciate Country A output growth Increase Appreciate Balance of Payments Record of the transaction of the residents of a country with the rest of the world. •Current account – trades in goods and services, and transfer of payments •Capital account – purchase and sale of capital assets (stocks, bonds, and land) Current account + Capital account surplus = 0 ie: you must balance a deficit in the current account with a surplus in capital account. Exchange Rate Systems Least Flexible Most Flexible Dollarization Currency board Fixed exchange rate Crawling peg Dirty flexible rate Clean flexible rates Crisis Management IMF List Privatize Deregulate Run a budget surplus (crowding in) Run a Provident Fund (increase savings) Free trade Free the exchange rate Control Population growth