ECON 319 Lecture Notes - Lecture 15: Exchange Rate, Canadian Dollar, Money Supply
9 Feb 2017
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Background: post ww2- countries established fixed exchange rates based on. The real exchange rate and money neutrality: real exchange rate r = epa / epb e is nominal exchange rate, Pa is price level country a and pb is price level country b: real cad depreciation = canadian goods are becoming cheaper relative to the us and the other way around. Money non-neutrality in short run: expansion/ contraction of money supply will shift ad curve and in the short run, lead to change in real gdp and price level. Money is not neutral in the short run. Wages and other factor prices adjust only slowly to output gaps, and hence do not quickly close output gaps. Cad monetary expansion, increases canadian price level, but must also depreciate the canadian dollar (raise e). Expectations in financial markets: financial capital is highly mobile and becoming even more so so should(cid:374)"t the(cid:396)e (cid:271)e e(cid:395)ual (cid:396)ates of (cid:396)etu(cid:396)(cid:374) o(cid:374) us a(cid:374)d ca(cid:374)adia(cid:374)
