ECON 2 Lecture Notes - Lecture 20: Kenyan Shilling, Devaluation, Foreign Exchange Market

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This model shows how the general equilibrium is determined in an open economy. The is, lm and bp curves are used to determine the level of income and interest rate that simultaneously clears the goods market, the money market and the market for foreign exchange in the economy. Exchange rate: this is the price of one currency in terms of another currency e. g & 1 = ksh. Depreciation of domestic currency: is a decline brought about by market force in the price of a domestic currency in terms of a foreign currency. Devaluation of domestic currency: is a decline brought about by government intervention in the official price of domestic currency in terms of foreign currency. Appreciation of domestic currency: is a rise brought about by market forces in the price of a domestic currency in terms of a foreign currency. Terms of trade: this refers to the ratio of exchange between a country"s exports and its imports.

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