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ECON 2410 (18)
Chapter 20

Chapter 20- Output, the Interest Rate and the Exchange Rate.pdf

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Department
Economics
Course
ECON 2410
Professor
Laurent Cellarier
Semester
Winter

Description
Chapter 20- Output, the Interest Rate and the Exchange Rate Definitions/Equations Uncovered Interest Parity‐ an arbitrage relation stating that domestic and foreign bonds must have the same expected rate of return, expressed in terms of a common currency (re‐written) 1▯▯ ▯ ▯▯ 1▯▯▯▯∗▯▯▯▯ - This equation tells us the following:  An increase in the domestic interest rate leads to an increase in the exchange rate  An increase in the foreign exchange rate leads to a decrease in the exchange rate  An increase in the expected future exchange rate leads to an increase in the current exchange rate IS‐LM Relationship‐ the new relationship for an open economy is written below ∗ ▯▯▯ ▯▯▯▯ IS: ▯ ▯ ▯ ▯▯▯ ▯▯▯ ▯,▯ ▯▯▯▯▯ ▯▯,▯ ,▯▯▯▯∗▯ ▯ LM: ▯▯▯▯▯ ▯▯▯ Peg‐ the exchange rate to which a country commits under a fixed exchange rate system Crawling Peg‐ an exchange rate mechanism in which the exchange rate is allowed to move over time according to a pre‐defined formula Band‐ the limits within which the exchange rate is allowed to move under a fixed exchange rate system Central Parity‐ the reference value of the exchange rate is all
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