Lectures in Macroeconomics- Charles W. Upton The Euro
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Lectures in Macroeconomics- Charles W. Upton
The Euro
The Euro 2
The Euro
• January 1999– Most European Nations adopt a common
currency, the Euro (€)
• January 2002– The domestic bills disappear and the
conversion is complete.
The Euro 3
Floating Exchange Rates
• After 1971, major currencies “floated”, with their values determined daily by the laws of supply and demand.
• See our US-Mexico example.
The Euro 4
The Case for Fixed Exchange Rates
$1Ohio=$1New York
• Enormous benefits to the economy.
• Eliminates uncertainty.– In trade– In investing
The Euro 5
T-shirts and CDs Yet Again
• Mexicans grow tired of American CD’s and the demand curve shifts to the left.
pCD = 2pTS
• T-shirts stay at 50 Pesos; CD’s at $15.
• The exchange rate must be $1 = 6 ²/³ Pesos.
The Euro 6
T-shirts and CDs Yet Again
• Mexicans grow tired of American CD’s and the demand curve shifts to the left.
pCD = 2pTS
• T-shirts stay at 50 Pesos; CD’s at $15.
• The exchange rate must be $1 = 6 ²/³ Pesos.
Before:
T-shirts at 50 PesosCD’s at 150 Pesos
T-shirts at $5CD’s at $15
The Euro 7
T-shirts and CDs Yet Again
• Mexicans grow tired of American CD’s and the demand curve shifts to the left.
pCD = 2pTS
• T-shirts stay at 50 Pesos; CD’s at $15.
• The exchange rate must be $1 = 6 ²/³ Pesos.
Before:
T-shirts at 50 PesosCD’s at 150 Pesos
T-shirts at $5CD’s at $15
After:
T-shirts at 50 PesosCD’s at 100 Pesos
T-shirts at $7.50CD’s at $15
The Euro 8
T-shirts and CDs Yet Again
• Mexicans grow tired of American CD’s and the demand curve shifts to the left.
pCD = 2pTS
• T-shirts stay at 50 Pesos; CD’s at $15.
• The exchange rate must be $1 = 6 ²/³ Pesos.
Before:
T-shirts at 50 PesosCD’s at 150 Pesos
T-shirts at $5CD’s at $15
After:
T-shirts at 50 PesosCD’s at 100 Pesos
T-shirts at $7.50CD’s at $15
You make Mexican widgets, for 200 pesos.
Before: $20.
After: $30
The Euro 9
Investing
• A Mexican firm wants to borrow 1 Billion Pesos ($100,000,000) for 10 years.
• Potential American Investors need to worry about– The Mexican firm’s credit-worthiness.– The US Inflation Rate– The Exchange Rate
The Euro 10
Investing
• A Mexican firm wants to borrow 1 Billion Pesos ($100,000,000) for 10 years.
• Potential American Investors need to worry about– The Mexican firm’s credit-worthiness.– The US Inflation Rate– The Exchange Rate
The Euro 11
Investing
• A Mexican firm wants to borrow 1 Billion Pesos ($100,000,000) for 10 years.
• Potential American Investors need to worry about– The Mexican firm’s credit-worthiness.– The US Inflation Rate– The Exchange Rate
If the loan is denominated in dollars:
The Mexican firm then worries about the exchange rate,
to see how much must be repaid 10 years hence
The Euro 12
The Role of The Central Bank
M
Y
MY
Ohio California
The Euro 13
The Role of The Central Bank
M
Y
MY
PUS
Ohio California
The Euro 14
Questions
• Does this make sense? Yes
The Euro 15
Questions
• Does this make sense? Yes
• Why is it working? ECB
The Euro 16
Questions
• Does this make sense? Yes
• Why is it working? ECB
• Will England Join? Probably
The Euro 17
Questions
• Does this make sense? Yes
• Why is it working? ECB
• Will England Join? Probably
• Should we Join? No
The Euro 18
Competition
• Most international transactions take place in US dollar, which is to our advantage.– Oil– Russian Holdings– Drug Dealers
The Euro 19
Competition
• Most international transactions take place in US dollar, which is to our advantage.
• European Community would like to compete.– Initial Rate: 1€= $1.18
The Euro 20
The 500 €
The Euro 21
The 500 $
The Euro 22
End
©2005 Charles W. Upton. All rights reserved
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