Question

[Shorty]

Hi,

Recently my mom' friend invited me to his work to show me his field and such. Anyways he gave me some questions that I thought would be worth finding out.

I'm just curious if you guys know the relations between the stock market, consumer price index, exchange rate, and interest rate as to if one were to go up what would happen to the rest?

I think I sort of have an idea I'm just wondering if someone else, who is more experienced in this field, could help me out.

I also checked out yahoo.ca for some relations but couldn't find anything of value.

Thanks

[catchme.kittens]

economics question after all!! lol...first of all, i am no genius by any means in economics...it just happens to be my favourite subject

k...i myself have an idea how everything u mentioned are related with each other...but can't exactly make the links to the stock market

exchange rate and interest rate are pretty closely linked together...say for example, if the interest rate in country A goes up, this means that all those investors out there in the rest of the other countries would want to move their money from their banks in their own countries to banks in country A since they would get a higher return on their money right?

exchange rate is basically determined by the demand and supply of a currency...so since the intrst rate in country A has gone UP, then ppl would want to move thier money from their banks to country A's banks...BUT in order to do this, they can't just MOVE the money they have, coz country A's bank won't recognize them...so they would have to convert thier money into the currency of country A...this increases the demand for country A's currency and HENCE, the exchange rate of a country would go up.

CPI is basically an indicator that measures the price of an average basket of goods that include housing, electricity, food and transportation. so if the CPI in a certain economy INCREASES, that would mean that, in general, cost of living has increased since the same goods in the "basket" are expensive to buy. (This usually happens when the AD (aggregate demand curve) moves to the right in a AD+AS diagram)

now say i live in country X...and the price of goods go up...now, me being a consumer, would like to buy goods from OUTSIDE the country rite? assuming that they have remained at the same price, since the CPI has increased in my country, i would now prefer to buy goods from other countries so i can save money...now multiply this thought by millions of ppl who wud think similarly...if everyone would want to buy imported goods, then they country would have to IMPORT more...but if country X was to increase their imports, that would mean they would have to buy more things from other countries, SO THIS WOULD INCREASE THE DEMAND OF THE OTHER CURRENCY and INCREASE THE SUPPLY OF COUNTRY X's CURRENCY...so the exchange rate of Country X would FALL and the exchange rate of the other country would rise (relative to country X).

{just as a side note...when we are talking abt demand and supply of currency...it means the demand and supply of a currency on the WORLD market...so if US wants to buy goods from Canada...they would have to buy the Canadian currency on the world market...this would mean that their is more of the US money on the world market...and if you draw a simple Demand and supply diagran...it would show that if the supply of smth increases, assuming everything else stays the same, the value of that thing will decrease}

hopefully this helps...and since it's such a long explanation i would be VERY surprised if you actually got this thing the first time...not that you may not be smart...but it's just that economics is like a GIANT circle....EVERYTHING in the world is related to economics so i may have said a little too much of stuff that u dint need to noe...so if you have ne questions, just fire away and i will try to the best of my abilities to help u!

[Shorty]

Thanks for the help

I read everything over, I think I have a decent idea of how this stuff works now. If I have anymore questions I'll be sure to make a post.

Again thanks for your help!

[Guest FFLcon]

I want to take a stab at the stock market. Using the past as an example, we know that when stock markets crash, recession quickly follows. The reason, I BELIEVE, is demonstrated with the AD curve.

When there is a crash in the stock market, the wealth of the household plummets (extreme deflation of their possessions so to speak). As a result of wealth effect in the aggregated demand curve (people feel poor, and so they spend less money), there is a decrease in the quantity of Real GDP demanded and a raise in price level, resulting in stagflation. The rest... is pretty much down hill from there.

[snowday]

I want to take a stab at the stock market. Using the past as an example, we know that when stock markets crash, recession quickly follows. The reason, I BELIEVE, is demonstrated with the AD curve.

When there is a crash in the stock market, the wealth of the household plummets (extreme deflation of their possessions so to speak). As a result of wealth effect in the aggregated demand curve (people feel poor, and so they spend less money), there is a decrease in the quantity of Real GDP demanded and a raise in price level, resulting in stagflation. The rest... is pretty much down hill from there.

Hey there, I'm not sure if I agree with your analysis, simply because most would agree that stagflation did not occur in the 1930s (a better example would be in the 1970s, when the price of oil spiked). I think that the stock market caused a shift in the AD curve leftwards (perhaps due to expectations, though I do not remember all the factors that cause AD to shift). This would account for the higher unemployment, since there would be a recessionary gap. It would also explain Keyne's theory that government should have increased spending to offset decreased private expenditure, which would have caused AD to shift rightwards (since government expenditure is a component of AD). Since Keynes' proposal would shift AD rightwards, I would assume that it would be because AD orginally shifted leftwards, as opposed to undergoing movement along the AD curve. A shift leftwards would cause a recession, though the price level would go down, not up. However, if anyone has any evidence that points to stagflation in the 1930s, I would be very interested in seeing it.

Hope it helps.