11/16/2012
Upcoming Events:
 FINAL EXAM: Thursday, December 13, 3:00 PM.
All chapters, readings; emphasis on the second half of chapter 12, and on chapters 13, 15, 16.
Assignment:
 Read Mankiw Brief Principles of Macro Chapter 13, “Open-Economy Macro: Basic Concepts.”
 Aplia problem set on Chapter 13 is due Sunday, November 25 (just before you return from
Thanksgiving break).
 Read Chapter 15 for Monday, November 26.
Announcements:
 Prof. Stratford Douglas, 416 B&E, 304-293-7863, smdouglas@mix.wvu.edu.
My office hours are MW following this class. Normally I will stay until 5:00 or later you like.
Let me know if you’re coming. For an appointment at another time, email me.
 The TA for this class is Imran Arif. Imran.Arif@mail.wvu.edu.
Imran’s Office Hours are MW 11:20–1:20 & Friday 12:00-1:00 in the BLRC (349 B&E).
Key Points from Last Time:
 The nominal exchange rate (e) of a dollar is its price in foreign currency. It is always expressed
in units of the foreign currency. (For example, e$ = £.70 per dollar.)
 The nominal exchange rate of the dollar relative to the British pound is the inverse of the nominal
exchange rate of the British pound relative to the dollar (e £ = 1/e$ = $1.43 per pound).
 Exchange rates are set by supply and demand of currency on foreign exchange markets. For
example, an increase in demand for a country's goods & services  D for its currency  e.
 NX rises and falls due to changes in domestic vs foreign income, consumer tastes for imports,
domestic vs foreign prices, exchange rates, costs of transportation, policies toward free trade.
 If a country’s currency depreciates, the cost of its exports to foreigners falls (and the cost of
imports rises), so American NX will tend to rise when the dollar depreciates.
Current Class Outline:
XIII. Open-Economy Macro: Basic Concepts
A. The International Flows of Capital and Goods
B. International Prices: Real and Nominal Exchange Rates
C. Purchasing Power Parity (PPP)
Link to GDP Components Spreadsheet
Trading Partners: Census Bureau Data
Trade Data: St. Louis Fed, Balance of Payments
Foreign Holdings of US Treasury Securities;
Federal Debt Outstanding
Nominal Exchange Rates (CNN Money)
Exchange Rate Data: St. Louis Fed
Burgernomics
XV. Aggregate Demand and Aggregate Supply
A.
B.
C.
D.
E.
Three Key Facts
Explaining Short-Run Economic Fluctuations
The Aggregate Demand Curve
The Aggregate Supply Curve
Two Causes of Economic Fluctuations
NBER Business Cycle Duration Table
Short term fluctuations are hard to predict . .
Unemployment rises when output falls.
. . . and lots of variables move together:
New Inflation Figures Out Yesterday (http://www.calculatedriskblog.com/2012/11/key-measures-show-low-inflation-in.html)
Quarterly trade surplus as a percentage of annual GDP, 1970 to present.
Today's iClicker Questions
These questions will raise your grade if you answer correctly, and may lower your grade if you don’t answer at all.
Wrong answers neither hurt nor help. You may go ahead and answer the first question below right now.
1) Suppose that a bottle of Dos Equis beer costs 10 pesos in Tijuana, Mexico and $2 a few miles
away in San Diego, California. If the exchange rate of the dollar is 10 pesos, which of the following
business plans is most likely to make money?
a) Use pesos to buy beer in Tijuana and sell beer for dollars in San Diego.
b) Use dollars to buy beer in San Diego and sell beer for pesos in Tijuana.
2) If a bottle of Dos Equis beer costs 10 pesos in Tijuana, Mexico and $2 a few miles away in San
Diego, California, and the nominal exchange rate of the dollar is 10 pesos, what is the real US
exchange rate of Dos Equis beer?
a) 10 x (10/2) = 50 pesos per beer.
b) .10 x (10/2) = ½ Mexican bottles per US bottle.
c) 10 x (2/10) = 2 Mexican bottles per US bottle
d) A Dos Equis in Tijuana is identical to a Dos Equis in San Diego, so the real exchange rate is 1
(i.e., one for one).
3) If you start a business that uses pesos to buy beer in Tijuana every week and sells beer for dollars
in San Diego every week, what will be the effect on the market for beer in Tijuana?
a) Increased supply of beer, causing the price of beer to fall.
b) Increased demand for beer, causing the price of beer to fall.
c) Increased supply of beer, causing the price of beer to rise.
d) Increased demand for beer, causing the price of beer to rise.
4) If you start a business that uses pesos to buy beer in Tijuana every week and sells beer for dollars
in San Diego every week, what will be the effect on the market for beer in San Diego?
a) Increased supply of beer, causing the price of beer to fall.
b) Increased demand for beer, causing the price of beer to fall.
c) Increased supply of beer, causing the price of beer to rise.
d) Increased demand for beer, causing the price of beer to rise.
5) If you start a large-scale business that uses pesos to buy beer in Tijuana every week and sells
beer for dollars in San Diego every week, you’ll need to exchange one currency for another every
week. What will be the effect on the nominal exchange rate of the peso?
a) Increased supply of pesos, causing the peso to depreciate.
b) Increased demand for pesos, causing the peso to depreciate.
c) Increased supply of pesos, causing the peso to appreciate.
d) Increased demand for pesos, causing the peso to appreciate.
6) Recall that the real US exchange rate of Dos Equis beer is 2 Mexican bottles per US bottle, which
creates an arbitrage opportunity for your export-import business. We’ve just figured out that your
business’s actions will tend to raise the price of beer in Mexico, lower it in the US, and cause the
peso to appreciate. What will be the effect on the real exchange rate of the peso?
a) it will fall until it reaches 0.
b) it will rise, but only slightly.
c) it will rise until you stop your arbitrage activities.
d) it will fall until it reaches 1.
7) If the US real exchange rate of a good with another country is above 1, then US businesses will
obtain arbitrage profits if they _____, and by doing so will drive the real exchange rate _____.
a) export; towards 1.
b) export; further away from 1.
c) import; further away from 1.
d) import; towards 1.
8) When purchasing power parity holds, a country’s real exchange rate will be ____ and there will be
a) 1; no arbitrage opportunities.
b) 1; many arbitrage opportunities.
c) 0; no arbitrage opportunities.
d) 0; many arbitrage opportunities.
ANSWERS:
1) A
2) C
3) D
4) A
5) D
6) D
7) D
8) A