ECON 1BB3 Lecture Notes - Money Supply, Arbitrage, Interest Rate Parity

• School: McMaster University
• Department: Economics
• Course: ECON 1BB3
• Professor: Bridget O' Shaughnessy

Document Summary

Summary of lecture notes from chapter 13 and practice questions. Key points: net exports are the value of domestic goods and services sold abroad minus the value of foreign goods and services sold domestically. Net capital outflow is the acquisition of foreign assets by domestic residents minus the acquisition of domestic assets by foreigners. When the nominal exchange rate changes so that each dollar buys more foreign currency, the dollar is said to appreciate or strengthen. This theory implies that the nominal exchange rate between the currencies of two countries should reflect the price levels in those two countries. In such economies, interest rate parity is expected to hold. Interest rate parity is a theory that predicts interest rates in canada will equal those in the rest of the world. We will no longer be assuming that the economy is a closed economy. Definition of closed economy: an economy that does not interact with other economies in the world.