Short-Run Exchange Rate Model

These flashcards cover key concepts related to economic models, exchange rates, and theories discussed in the lecture notes.

Economic Models

Use simplifying assumptions to illuminate specific situations and issues.

Exogenous Variables

Inputs into economic models that are 'givens'; they come from outside the model.

Endogenous Variables

Variables that are determined by the model and the behavior of the exogenous variables.

Quantity Theory of Money

A model that relates the money supply to the price level and output.

Purchasing Power Parity (PPP)

An economic theory that states that the exchange rate between two currencies is equal to the ratio of their price levels.

Nominal Interest Rate Differential

The difference in nominal interest rates between two countries.

Real Interest Rate Parity

A condition where the inflation differential equals the expected depreciation.

Fisher Effect

The relationship between inflation and interest rates, stating that changes in the inflation rate will lead to changes in nominal interest rates.

Overshooting Model

A short-run model that assumes prices are sticky and that the home currency temporarily depreciates before reaching long-run equilibrium.

Arbitrage Condition

An investment strategy to take advantage of price differences in different markets, ensuring no arbitrage profits.