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section                               8



             Module 41 Capital Flows and the Balance
                      of Payments
             Module 42 The Foreign Exchange Market    The Open
             Module 43 Exchange Rate Policy
             Module 44 Exchange Rates and
                      Macroeconomic Policy
             Module 45 Putting It All Together             Economy:
             Economics by Example:
                                                      International
             “Is Globalization a Bad Word?”



                                                           Trade and





                                                      Finance









             “You should see, when they come in the door, the shopping  85 cents. By mid -2008 it was worth more than $1.50, and
             bags they hand off to the coat check. I mean, they’re just  in early 2010 it’s value had fallen again, to less than $1.28.
             spending. It’s Monopoly money to them.” So declared a  What causes the relative value of the dollar and the
             New York restaurant manager, describing the European  euro to change? What are the effects of such changes?
             tourists who, in the summer of 2008, accounted for a large  These are among the questions addressed by  open -
             share of her business. Meanwhile, American tourists in Eu-   economy macroeconomics, the branch of macroeconomics
             rope were suffering sticker shock. One American, whose  that deals with the relationships between national
             family of four was visiting Paris, explained his changing va-  economies. In this section we’ll learn about some of the
             cation plans: “We might not stay as long. We might eat  key issues in open - economy macroeconomics: the deter-
             cheese sandwiches.”                                                              minants of a country’s
               It was quite a change                                                          balance of payments, the
             from 2000, when an arti-                                                         factors affecting  ex-
             cle in the New York Times                                                        change rates, the differ-
             bore the headline: “Dol-                                                         ent forms of  exchange
             lar makes the good life a                                                        rate policy adopted by
             tourist bargain in Eu-                                                           various countries, and
             rope.” What happened?                                                            the relationship be-
             The answer is that there                                                         tween exchange rates
             was a large shift in the                                                         and  macroeconomic
             relative values of the euro,                                                     policy. In the final
             the currency used by                                                             module we will apply
             much of Europe, and the                                                          what we have learned
             U.S. dollar. At its low  Bloomberg via Getty Images                              about macroeconomic
             point in 2000, a euro                                                            modeling to conduct
             was worth only about                                                             policy analysis.






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