ABSTRACT
In national economies as well as in the world economy, money plays an important role, as a unit of measurement, as a medium of exchange and as a store of value. Money reduces the costs of transactions. This chapter discusses the exchange rate can follow purchasing power parity, but it may also be determined by interest rate parity and it may overshoot in the short and the medium run. It describes expectations play a major role and presents some empirical evidence on purchasing power parity. The chapter discusses the role of the three major currencies of the world. Monetary equilibrium and purchasing power parity are also related to the foreign currency market and to the balance-of-payments position of a country. The markets quickly required a premium on the national interest rates and eventually induced a devaluation of the national currency.
