By looking closely at these price changes we can also learn a great deal about what the market expects. Suppose we know that Alan Greenspan is going to make an annoucement next Tuesday. This situation is not unusual, as it is usually known weeks in advance when the Federal Reserve Chairman is going to give a speech or make an annoucement. We can tell what investors' best predictions on the content of the annoucement is going to be by looking at exchange rates. If the exchange rate drops or rises, we should expect to see a change in the interest rate, while if the exchange rate stays the same, it's likely that no change will be made. Of course this is an oversimplification as annoucements by the Federal Reserve influence all sorts of variables, not just the exchange rate. However it is apparent that if we watch how prices change we can determine what the investment community feels will happen in the future.
In a country with a free market economy, prices are not set by a central planning bureau: they are set by supply and demand. Because supply and demand reflect the information and beliefs of investors in those markets, they contain the sum total of all the information and beliefs the investors have in a market. While we might not have the power to change people's actions or beliefs, the price mechanism gives us the power to observe those actions and beliefs. Prices are far more than just what you have to pay for something, they are also a source of great knowledge if intepreted correctly.
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