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10 Cards in this Set

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Trade or elasticities approach
The theory or approach that stresses the role of trade or the flow of goods and services in the determination of exchange rates. More useful in the long run, than short run. Can't explain 1. the large volatility of exchange rates over the past three decades 2. the sharp appreciation of the dollar from 1980-85 and 1995-2002 or 2. the failure of the U.S. trade deficits to decline when the dollar depreciated sharply from 85-88 and 02-04.
Purchasing Power Parity (PPP) theory
The theory that postulates that the change in the exchange rate between two currencies is proportional to the change in the ratio in the two contries general price levels.
Absolute purchasing power parity theory
Postulates that the equilibrium exchange rate is equal to the ratio of the price levels in the two nations. This version of the PPP theory can be very misleading. R=P/P*
Law of one price
The proposition that in the absence of transportation costs, tariffs and other obstructions to the free flow of trade, the price of each homogeneous (identical) traded commodity will be equalized in all markets by commodity arbitrage.
Relative purchasing power parity theory
the theory that postulates that the percentage change in the exchange rate is equal to the difference in the percentage change in the price level in the two countries. dR=dP/dP*
Monetary model of exchange rates
The theory that postulates that exchange rates are determined in the process of equilibrating or balancing the stock or total demand and supply of money in each nation.
Nominal Exchange Rate
the exchange rate or the domestic currency price of the foreign currency
Real exchange rates
the nominal exchange rate weighted by the consumer price index in the two nations
Asset or portfolio model of exchange rates
the theory that postulates that exchange rates are determined in the process of equilibrating or balancing the demand and supply of financial assets in each country.
Exchange rate overshooting
The tendency of exchange rates to immediately depreciate or appreciate by more than required for long-run equilibrium and then partially reversing their movement as they move toward their long run equilibrium levels.