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Essay / Research Paper Abstract
This 7 page paper considers different models that are used to explain exchange rate movements, including purchasing parity theory, the International Fisher Effect and the monetarist approach. The bibliography cites 6 sources.
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7 pages (~225 words per page)
File: TS14_TEtheexc.rtf
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Unformatted sample text from the term paper:
there are also irrational movements. In an effort to understand the movements of exchange rates different models have been developed. In looking at these they have a commonality, that they
will explain some of the movements, but not all. The best known is that of purchasing parity theory. This theory is one of the way that the exchange rates
may behave between two different countries according to the price levels n those countries (Anonymous, 2000). The basis of the theory is
that goods or services should be the same in different countries as if there were a single or common currency (Anonymous, 2000). The theory is based on price; the Law
of One Price; this is a no arbitrage condition that tells us the price in two different nations should identical when the currency is converted into that of the comparative
nation (Anonymous, 2000). The absolute Purchasing Power Parity (or PPP) spot exchange rate is determined by relative prices for a collection of
similar goods in the different nations (Anonymous, 2000), for example we can look at the price of butter in the United States and in the United Kingdom; if D=US$/UK?
then the abiding by this law of one price, butter in the United Kingdom should be *D = butter price in the US. Therefore, D should be equal to
the price of butter in the US/the price of butter in the United Kingdom (Anonymous, 2000). This example is a purchasing power parity for a single item,
but look at the real world paradigm does not prove true. We all know that when we are on holiday abroad there are some items which will be more expensive
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