CHEAT SHEET
NOTATION and IDENTITIES. (Other equations below) Symbol Y C I G EX IM CA Sp Sg S E, E$/€ Meaning Identities or Definitions Y = C + I + G + EX - IM
GNP or National Income or GDP Consumption Investment Government Purchases Exports Imports Current Account Private saving Government saving National saving Spot exchange rate: (Dollars per one Euro) Forward exchange rate: (Dollars per one F, F$/€ Euro) Expected rate of return on dollar asset R$ measured in dollars Expected rate of return on euro assets R€ measured in euros Expected rate of return on foreign assets R($) measured in dollars Domestic rate of return in domestic R currency, interest rate Foreign rate of return in foreign currency R* P (P*) Domestic (foreign) economy price level Money demand Md π (π*) Domestic (foreign) inflation rate
CA = EX - IM
S = Y - C - G, S = Sp + Sg
R($) = R€ + (Ee$/€ - E$/€)/E$/€
q , q$/€ Real exchange rate: (dollars versus euros) r (r*) Real domestic (foreign) interest rate
Md = P * L(R,Y) πt = (Pt - Pt-1)/Pt-1 q$/€ = E$/€PE / PUS, q = EP*/P
ŷ xe
Growth rate of y Expected value of x
ŷ t= (yt - yt-1)/yt-1
EQUATIONS Money market equilibrium: Ms/P = L(R,Y) Uncovered interest parity: R$ = R€ + (Ee$/€ - E$/€)/E$/€, or R = R* + (Ee - E)/E Covered interest parity: R$ = R€ + (F$/€ - E$/€)/E$/€, or R = R* + (F - E)/E Law of one price (LOP): PiUS = E$/€ × PiE, or Pi = E × P*i (Absolute) Purchasing power parity (PPP): PUS = E$/€ × PE, or P = E × P* Relative PPP: πUS,t = (E$/€, t - E$/€, t-1)/E$/€, t-1 + πE, t, or π = Ê + π* Fisher equation: R = r + πe Real interest parity: re$ = re€ + (qe$/€ - q$/€)/q$/€, or re = re* + (qe - q)/q