- •6. Fiscal policy affecting is_lm model
- •7. Monetary policy affecting is_lm model
- •9.Aggregate Demand
- •36. Measuring economic growth
- •37 Factorsaffectingeconomicgrowth
- •1.Capital
- •39 Theneoclassicalmodel
- •2.Technological Progress
- •3.Investment
- •4.Health
- •40 Endogenousgrowththeory
- •41 Unifiedgrowththeory
- •36. Measuring economic growth
- •40 Endogenous growth theory
- •41 Unified growth theory
- •37 Factors affecting economic growth
- •1.Capital
- •2.Technological Progress
- •3.Investment
- •4.Health
- •4.Health
- •39 The neoclassical model
- •15. Foreign exchange rate
- •16. Arbitrage
- •17. Nominal exchange Rate
- •19. Fixed exchange rate
- •20. Floating/flexible exchange rate
- •Managed exchange rate
- •22. Determinants of foreign exchange rate
- •23. Theory of Purchasing Power Parity(ppp)
- •Theory of Interest Rate Parity
- •25. Coveredinterestrateparity
- •26. The Balance of Payment Theory
- •27. ForecastingExchangeRates
- •In short term
- •In Medium and Long-term
- •29.The Flow of Goods: Exports, Imports, Net Exports
- •30.The Flow of Financial Resources: Net Capital Outflow, Saving, Investment, and Their Relationship to the International Flows
- •31.Mundell–Fleming model
- •32. Monetary policy at the fixed exchange rate
- •33.Fiscal policy at the fixed exchange rate
- •1. General theory of is-lm model
- •2.A Short Run Model of a Closed Economy: the is-lm model
- •3.The construction of the is curve (downward curve, shifting, describing)
- •Shifting the is Curve
- •4. The construction of the lm curve (upward curve, shifting, describing)
Theory of Interest Rate Parity
This theory states that premium or discount of one currency against another should reflect the interest differential between the two currencies
The currency of the country with a lower interest should be at a forward premium in terms of the currency of the country with a higher rate
In an efficient market with no transaction costs, the interest differential should be ( approximately) equal to the forward differential
When this condition is met, the forward rate is said to be at interest rate parity and equilibrium prevails in the money markets
Thus, the forward discount or premium is closely related to interest differential between the two currencies
Looked at differently, interest rate parity says that the spot price and the forward, or futures price, of a currency incorporate any interest rate differentials between the two currencies assuming there are no transaction costs or taxes
25. Coveredinterestrateparity
Interest parity ensures that the return on a hedged ( or ‘covered’) foreign investment will just equal the domestic interest rate on investments of identical risk
Which means the covered interest differential – the difference between the domestic interest rate and the hedged foreign rate- is zero
Investment of $ 10,00,000 for 90 days
New York ( Dollar) Interest Rate : 8% p.a.
Frankfurt ( Euro) Interest Rate : 6% p.a.
Investment in dollar will yield : $ 10,20,000
26. The Balance of Payment Theory
The balance of payments approach is another method that explains what the factors are that determine the supply and demand curves of a country’s currency.
As it is known from macroeconomics, the balance of payments is a method of recording all the international monetary transactions of a country during a specific period of time.
The transactions recorded are divided into four categories: the current account transactions, the capital account transactions, financial account and the central bank transaction.