ECON 1020H Chapter Notes - Chapter 19: Auguste Forel, Interest Rate, Aggregate Demand
21 Jan 2016
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Chapter 19 notes for exam. What you will learn in this chapter. The meaning of the balance payments accounts. The determinants of international capital flows. The role of the foreign exchange market and the exchange rate. The importance of real exchange rates and their role in the current account. The balance of payments on financial account, or financial account measures capital flows. By definition, the balance of payments on current account plus the balance of payments on financial account is zero. Currencies are traded in the foreign exchange market; the prices at which they are traded are exchange rates. When a currency rises against another currency, it appreciates; when it falls, it depreciates. The current account responds only to changes in the real exchange rate, not the nominal exchange rate. Countries adopt different exchange rate regimes, rules governing exchange rate policy. Finally, they can use foreign exchange controles. Exchange market intervention requires large reserves, and exchange controls distort incentives.
