Monetary Policy, Money, International Trade, and the Exchange RateShahzad AhmadUzair AkhtarConnor Dickson

MoneyWithout money, we use bartering

Stocks - claim ownership of the firmBonds- debt financing; they borrow money and have interest payments

Functions of Money:

Medium of exchangeUnit of accountStore of value

FV = PV(1+r)Future Value= Present Value * (1 + interest rate)

Money

M1: - Currency--Checkable Deposits--most liquid money

M2:- M1 plus near-monies- Savings deposits, MMDA, MMMF- Small time deposits

M3: - Large time deposits

Money Supply is measured by the central bank as M1, M2, and M3

Monetary Policy

Contractionary: - AD shifts left- Sell bonds- Increase interest rate- Increase reserve ratio

Expansionary: - AD shifts right- Buy bonds- Decrease interest rate- Decrease reserve ratio

Open Market Operations (OMO) - deal with the buying and selling of government bonds and securities

Exchange Rate

Demand for foreign currency appreciates because of increases in travel, trade, and investment.

Foreign governments control the supply of foreign currency.

Exchange Rates example

Assume the Japanese Yen depreciates…

• Japanese exports to the US increase

• US dollar appreciates (increases in value)

• US exports to Japan decrease

International TradeCountries base their decision on which country to trade with based on Comparative Advantage and Absolute Advantage.

Comparative Advantage is defined as the ability to produce a good at lower opportunity cost than all other producers.

Absolute Advantage is defined as the ability to produce more of a good than all other producers.

International TradeBarriers to Trade:• Tariff – a tax on imports into a country or exports out of a

country

• Quota – a limit on the quantity or value of imports or exports set by the government

Balance of payments statement – tracks the flow of payments received and payments given.