International Monetary Linkages

In Chapter 7 we discussed the interactions of an economy with the rest of the world by analyzing the international markets for goods and credit. Now that we are familiar with the domestic monetary sector we are ready to explore the other major international linkages, those deriving from foreign exchange markets. In Chapter 7, we could not discuss exchange rates because we assumed that all countries used a common currency, the ECU, and that all prices were quoted in units of this currency. To analyze exchange rates, we have to introduce different types of currency (pounds, dollars, yen, marks, etc.) and allow for prices to be quoted in these different currency units. This chapter makes the necessary extensions to consider these matters.