Rational Expectations, Uncertainty and Exchange Rate Determination

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1979
Authors
Enders, Walter
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Lapan, Harvey
University Professor Emeritus
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Economics

The Department of Economic Science was founded in 1898 to teach economic theory as a truth of industrial life, and was very much concerned with applying economics to business and industry, particularly agriculture. Between 1910 and 1967 it showed the growing influence of other social studies, such as sociology, history, and political science. Today it encompasses the majors of Agricultural Business (preparing for agricultural finance and management), Business Economics, and Economics (for advanced studies in business or economics or for careers in financing, management, insurance, etc).

History
The Department of Economic Science was founded in 1898 under the Division of Industrial Science (later College of Liberal Arts and Sciences); it became co-directed by the Division of Agriculture in 1919. In 1910 it became the Department of Economics and Political Science. In 1913 it became the Department of Applied Economics and Social Science; in 1924 it became the Department of Economics, History, and Sociology; in 1931 it became the Department of Economics and Sociology. In 1967 it became the Department of Economics, and in 2007 it became co-directed by the Colleges of Agriculture and Life Sciences, Liberal Arts and Sciences, and Business.

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1898–present

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  • Department of Economic Science (1898–1910)
  • Department of Economics and Political Science (1910-1913)
  • Department of Applied Economics and Social Science (1913–1924)
  • Department of Economics, History and Sociology (1924–1931)
  • Department of Economics and Sociology (1931–1967)

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The theory of exchange rate determination has evolved considerably in recent years. Starting from a supposition that exchange rates were determined by Balance of Trade equilibrium, and hence-reflected "real" factors, the resurgence of the Monetary Theory has caused a sharp change in perceptions as to how exchange rates are determined. The Monetary Approach to the Balance of Payments focused attention upon the role of currencies as assets and hence viewed the exchange rate as a relative price of two assets. Thus, those factors that, determine the demand for each currency - as well as the supply - are seen to explain exchange rates. Since, in the context of the Monetary Approach the demands for currencies are generally transactions demands, and since transaction demands for each currency are generally assumed proportional to nominal domestic output (with, perhaps, the rate of interest also affecting transactions demand), the general conclusion emerges that the exchange rate between two currencies will depend upon the ratio of domestic output levels, as well as the ratio of currency supplies.

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