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The exchange rate is defined as the price of one unit of currency in terms of another currency. If one euro costs 1.5 USD then 1 USD costs 1/1.5 = 0.667 euro. If the exchange rate is stated in terms of the euro (for example, 1.5 USD/euro) then the euro is called the base currency or the unit currency.

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The open economy

So far, our model for exchange rate determination has been very simple. We have assumed that domestic interest rates are unaffected by foreign interest rates. We begin this chapter by looking more carefully at this assumption (the classical model of exchange rate determination). Then, a more realistic model of exchange rate determination is considered.

Finally, we will discuss the Mundell- Fleming model (MF-model).

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The structure of the American economy is evolving. Technology is one of the driving forces, both domestically and in integrating the U.S. economy with the global economy. The domestic economy does not operate in a vacuum.In a relatively open global economy, structural change in emerging economies causes structural change in advanced countries.