Chapter 18 Foreign Exchange

Chapter Objectives

By the end of this chapter, students should be able to:

1. Define foreign exchange and explain its importance.
2. Describe the market for foreign exchange.
3. Explain why countries shouldn’t be proud that it takes many units of foreign currencies to purchase a single unit of their currency.
4. Define purchasing power parity and explain its importance.
5. List and explain the long-run determinants of exchange rates.
6. List and explain the short-run determinants of exchange rates.
7. Define the interest parity condition and explain when and why it holds.