1. Exchange Rates and Macro Policy Chapter 19-4

2. Evaluation and Revaluation A devaluation is a reduction in the value of a currency that previously had a fixed exchange rate. A revaluation is an increase in the value of a currency that previously had a fixed exchange rate.

3. Monetary Policy & the Exchange Rate

4. M Competi- tiveness Expansionary monetary policy i P Y Net Effect of Monetary Policy on Exchange Rates Exchange rate L-R effect Exchange rate Imports McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

5. M Competi- tiveness Imports Contractionary monetary policy i P Y Net Effect of Monetary Policy on Exchange Rates Exchange rate L-R effect Exchange rate McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

6. The Net Effect of Monetary Policy on Exchange Rates Appreciates!  Contractionary monetary policy increases exchange rates. Appreciates!  Expansionary monetary policy decreases the exchange rate. Depreciates!

7. International Business Cycle The fact that one country’s imports are another country’s exports creates a link between the business cycle in different countries. Floating exchange rates, however, may reduce the strength of that link.