1. Lectures in Macroeconomics- Charles W. Upton The Euro

2. 2 January 1999 –Most European Nations adopt a common currency, the Euro (€) January 2002 –The domestic bills disappear and the conversion is complete.

3. 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.

4. The Euro 4 The Case for Fixed Exchange Rates $1 Ohio =$1 New York Enormous benefits to the economy. Eliminates uncertainty. –In trade –In investing

5. The Euro 5 T-shirts and CDs Yet Again Mexicans grow tired of American CD’s and the demand curve shifts to the left. p CD = 2p TS T-shirts stay at 50 Pesos; CD’s at $15. The exchange rate must be $1 = 6 ²/ ³ Pesos.

6. The Euro 6 T-shirts and CDs Yet Again Mexicans grow tired of American CD’s and the demand curve shifts to the left. p CD = 2p TS 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 Pesos CD’s at 150 Pesos T-shirts at $5 CD’s at $15

7. The Euro 7 T-shirts and CDs Yet Again Mexicans grow tired of American CD’s and the demand curve shifts to the left. p CD = 2p TS 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 Pesos CD’s at 150 Pesos T-shirts at $5 CD’s at $15 After: T-shirts at 50 Pesos CD’s at 100 Pesos T-shirts at $7.50 CD’s at $15

8. The Euro 8 T-shirts and CDs Yet Again Mexicans grow tired of American CD’s and the demand curve shifts to the left. p CD = 2p TS 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 Pesos CD’s at 150 Pesos T-shirts at $5 CD’s at $15 After: T-shirts at 50 Pesos CD’s at 100 Pesos T-shirts at $7.50 CD’s at $15 You make Mexican widgets, for 200 pesos. Before: $20. After: $30

9. 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

10. 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

11. 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

12. The Euro 12 The Role of The Central Bank M Y M Y OhioCalifornia

13. The Euro 13 The Role of The Central Bank M Y M Y P US OhioCalifornia

14. The Euro 14 Questions Does this make sense? Yes

15. The Euro 15 Questions Does this make sense? Yes Why is it working? ECB

16. The Euro 16 Questions Does this make sense? Yes Why is it working? ECB Will England Join? Probably

17. The Euro 17 Questions Does this make sense? Yes Why is it working? ECB Will England Join? Probably Should we Join? No

18. The Euro 18 Competition Most international transactions take place in US dollar, which is to our advantage. –Oil –Russian Holdings –Drug Dealers

19. 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

20. The Euro 20 The 500 €

21. The Euro 21 The 500 $

22. The Euro 22 End ©2005 Charles W. Upton. All rights reserved