Ec340H Final

Front 1

If we took D dollars and invested it in U.S. assets, at the end of the period, how many dollars are we left with?

Back 1

Original amt of D dollars + the interest gained on it

Front 2

what is "e"?

Back 2

spot exchange rate: "on the spot" trading; within 2 business days

Front 3

How many pounds will D dollars buy (given e = $/lbs)

Back 3

D dollars will buy (D/e) pounds

Front 4

"f"?

Back 4

forward exchange rate
a rate agreed on today but transaction takes place later

Front 5

if I invest D dollars into pounds, how much will i get back in the FUTURE?

Back 5

(D/e)*(1+iuk)*(f) Dollars

Front 6

Equilibrium rate between dollars and pounds:

Back 6

D(1+ius) = (D/e)*(1+iuk)*(f)

Front 7

"covered interest arbitrage"

Back 7

Borrow (D/e) pounds, owe (D/e)(1+ius) in the future
use pounds to buy U.S. asset: get D(1+ius) dollars in future, pay off loan with D/e(1+iuk)f dollars
-->"covered" guarantees the equality that D(1+ius)=(D/e)(1+iuk)f

Front 8

"covered interest parity condition"

Back 8

note that the equality must be satisfied in order for this to work
approximation: f & e usually not that different, so (f/e) about = 1

Front 9

If POSITIVE --> "forward premium"
if NEGATIVE --> "forward discount" on British pound

Back 9

What is this? if positive? if negative?

Front 10

the total return on British asset measured in dollars (if exchange rates are $/lbs)

Back 10

Thanks to the covered interest parity, this vaue represents what?

Front 11

terms for not "covered" investment?

Back 11

not insure
hedge
take an 'open' position

Front 12

What is the "Balance of Payments" or "International Transactions Statement"?

Back 12

An accounting statement recording all transactions between residents of one country and those in the rest of the world during some period of time.

Front 13

(In general) from the U.S. perspective, what is a "credit"?

Back 13

1. + (positive)
2. Anytime an American sells a good/service to foreigner
3. Foreigner increases ownership of American assets

Front 14

(In general) from the U.S. perspective, what is a "debit"?

Back 14

1. - (negative)
2. Americcan buys goods/services from foreigner
3. American increase holdings of foreign assets

Front 15

What are the three types of "accounts" in the BOP?

Back 15

Current account, capital account (financial account), official reserve account

Front 16

What is the current account?

Back 16

imports/exports of goods/services, investment income, unilateral transfers

Front 17

What is the capital account/financial account?

Back 17

transfer of assets, checks

Front 18

What is the official reserve account?

Back 18

records international transactions undertaken by a country's monetary authority (U.S. --> Fed Reserve; EU--> European Central Bank)

Front 19

For the U.S., what are credits to the current account?

Back 19

1. EXPORT of goods/services
2. Investment income earned
3. Unilateral transfers received

Front 20

For the U.S., what are Debits to the current account?

Back 20

1. Import of goods/services
2. Investment income paid
3. Unilateral transfers given

Front 21

For the U.S., what are credits to the capital account?

Back 21

1. Foreign increases holding of U.S. assets
2. American writes check to foreigner

Front 22

For the U.S., waht are debits to the Capital account?

Back 22

1. American increases holdings of foreign assets
2. Foreigner writes check to American

Front 23

For the U.S., what are credits to the Official Reserve Account?

Back 23

Foreign monetary authorities buy U.S.($) reserves

Front 24

For the U.S., what are debits to the Official Reserve Account?

Back 24

Fed buys foreign currency reserves

Front 25

What kind of system is the BOP?

Back 25

system of double-tracking book-keeping
every transaction has two sides

Front 26

BOP: 2 issues to all Credits = all debits (i.e. Balance)

Back 26

1. don't have perfect bookkeeping
2. not all credits and debits in same account

Front 27

Current account(as %GDP) rltnsp between surplus/deficit and credit/debit:

Back 27

1. Surplus (Credit>Debit)
2. Deficit (Credit<Debit)

Front 28

Terminology, CA+KA =?

Back 28

CA+KA=B
"Basic Balance"

Front 29

What is the Basic Balance used for?

Back 29

-used as another measure of the state of the economy
-only reason why central banks buy foreign curency reserves is to influence the value of their currency

Front 30

CA+KA+OR=?

Back 30

CA+KA+OR=0
B= -OR

Front 31

What is the U.S. CA %GDP?

Back 31

the current account is almost -6%GDP

Front 32

Suppose OR=0. What does it mean if CA<0 and KA>0?

Back 32

-U.S. is a net-debtor country
-Foreigners are acquiring US Assets more rapidly than Americans are acquiring foreign assets

Front 33

What does it mean for the U.S. to be a net-debtor country?

Back 33

if we were to cash out all assets we would owe foreigners assets

Front 34

Domestic Absorption(A)=?

Back 34

A = C+G+I

Front 35

NX =?

Back 35

X-M = CA
(with adnustments for unilateral transfers, investment interest, etc.)

Front 36

CA= Y-A
Therefore, if CA is negative then..?

Back 36

If CA<0, then A>Y (absorption > income) or Y-A < 0
so we spend more than we produce! in order to do this we have to borrow from foreigners

Front 37

Y= C+G+I+(X-M) = C+S+T
means what?

Back 37

Y= GDP(Output) = Ntnl Income

Front 38

In terms of GDP = Ntnl Income, what does CA =?

Back 38

CA = S + (T-G) - I
CA = Saving - Investment

Front 39

CA = S + (T-G) - I
If CA<0, then?

Back 39

If CA<0 then Ntnl saving less than investment saving
Invest less (decrease absorption) and save more

Front 40

Why is every trade double-counted?

Back 40

double-counted since there's two currencies

Front 41

"we are quoting the exchange rate in European terms" -->

Back 41

how many Euros to $1

Front 42

"we are quoting the exchange rate in American terms"-->

Back 42

the $ cost of foreign currency

Front 43

What should exchange models account for?

Back 43

1. high volatility in minute-to-minute trading (SR)
2. long-term trends (LR)

Front 44

Who are the participants in the Foreign Exchange Market?

Back 44

1. very large financial institutions around the world
2. multinational corporations
3. Central banks

Front 45

What are the 2 markets in the FX market?

Back 45

1. Interbank (wholesale)
2. Retail
Central Banks(Their purpose of buying/selling is to influence the foreign exchange rate)

Front 46

Arbitrage:

Back 46

a riskless activity of buying low and selling high
the purchases and sells are made almost simultaneous; NOT waiting

Front 47

Two types of arbitrage:

Back 47

1. Locational Arbitrage
2. Triangular Arbitrage

Front 48

Locational arbitrage

Back 48

Exchange rate in one location is different than another location (ex. NY and London) buy cheap sell high

Front 49

Triangular Arbitrage

Back 49

involves three currencies; two direct rates and one crossrate

Front 50

Why does Supply and Demand analysis apply well to the foreign exchange market?

Back 50

since the FX displays all the qualities of a perfectly comopetitive market: all price-takers; high competition; perfect information

Front 51

FX market: Why is the demand curve downwards sloping?

Back 51

When the pound gets cheaper, then the things that the pound buys gets cheaper

Front 52

Is the supply curve upward sloping?

Back 52

the supply curve may not be upward sloping(ordinally think of MC of production) but we are not producing currency

Front 53

What part of the FX market does the Demand and Supply curves represent?

Back 53

D & S from PRIVATE actors
Demand curve does not take into account central banks; all private transactions

Front 54

What do the two "E"s stand for?

Back 54

E high bar: "max desired value of the $": the max value the Chinese govt wants the $ to achieve
E low bar: lowest desired value of $

Front 55

What does the distance "A" represent?

Back 55

The Q$ the chinese govt has to supply to FX market to maintain rate

Front 56

At E high bar, what is the value of the dollar and yuan in relation to each other?

Back 56

at E high bar, the dollar is undervalued and the yuan is overvalued

Front 57

What if this demand shock is permanent?

Back 57

the Chinese govt will run out of dollars, then the dollar will appreciate and the yuan will depreciate

Front 58

not insured/uncovered investment

Back 58

What type of investment does the spot exchange rate represent?

Front 59

What is the expectation of how many dollars an investor will have at the end of the period for an UNINSURED investment?

Back 59

expectation of how many dollars i'll have at the end of the period

Front 60

If risk neutral then I am indifferent between two assets if they have the same expected return. Show this equation:

Back 60

risk neutrality

Front 61

What does this equation lead to?

Back 61

the uncovered interest parity condition

Front 62

What is the equation for the uncovered interest parity condition?

Back 62

uses expected exchange rate

Front 63

what does this represent

Back 63

if POSITIVE: the expected % appreciation of pound
if NEGATIVE: expected % depreciation of pound

Front 64

what drives the spot exchange rate?

Back 64

average belief/market belief

Front 65

if we have BOTH covered and uncovered interest parity, then...

Back 65

the forward exchange rate = expected exchange rate

Front 66

Since f = e(expected) then...

Back 66

every time e(expected) changes, f changes with it

Front 67

What happens if the interest rates are fixed/not changing?

Back 67

If interest rates are not changing minute to minute but "f" is, then "e" must also change minute to minute

Front 68

Why is "e" always changing?

Back 68

As new information is available, influences "e"
since information is always changing, "e" always changing

Front 69

What is hedging?

Back 69

a.) hedging involves acquiring an asset in a foreign currency to offset a net liability position already held in the foreign currency, or acquiring a liability in a foreign currency to offset a net asset position already held.
b.)hedging means reducing both kinds of "open" positions in a foreign currency--both long positions and short positions

Front 70

what is a "long position"?

Back 70

holding net assets in a foreign currency

Front 71

what is a "short position"?

Back 71

owing more of the foreign currency than one holds

Front 72

what is a "futures contract"?

Back 72

a piece of paper; specifies few specified future dates in the future that says you can exchange currency
-these can be bought and sold multiple times before the specified date

Front 73

what is an "options contract"?

Back 73

more like insurance policy: buy a premium to protect-->
option to buy ("call")
option to sell ("put") --> gives me the right (NOT the obligation) to sell currency at a specified price ("strike price"(exercise price)) on specified date

Front 74

what determines whether or not i will choose to sell with an options contract?

Back 74

depends on the spot exchange rate on that specified date

Front 75

Short Run vs. Long Run exchange rate determination

Back 75

Short Run: Interest parity
Long Run: Purchasing Power Parity (absolute and relative)

Front 76

What does absolute PPP say?

Back 76

at a given point of time, if two goods are completely identical then the price must be the same everywhere
(price levels and exchange rate at a moment in time)

Front 77

What does relative PPP say?

Back 77

percent depreciation of dollar = U.S. inflation - Foreign inflation
(inflation and the exchange rate)

Front 78

What is exchange rate overshooting?

Back 78

the immediate impact of unexpected change in monetary policy has a bigger impact than the eventual long-run impact

Front 79

What is the monetary model?

Back 79

if U.S. money supply increases by x% then all U.S. prices ultimately increase by x%

Front 80

What is the rltnsp between exchange rate overshooting and the monetary model?

Back 80

one of the prices is the price of foreign currency (i.e. foreign currency appreciates by x%, $ depreciates by x%)

Front 81

This is the normal long-run values. but what does overshooting say?

Back 81

overshooting says that a decrease in MS will cause people to think that the expected exchange rate will be higher than what it actually is

Front 82

What is the reasoning behind overshooting?

Back 82

uncovered interest parity

Front 83

What are the different degrees on the exchange rate spectrum?

Back 83

Floating/Flexible, Managed/Dirty float, Adjustable Peg, Fixed/Pegged exchange rate

Front 84

What are the qualities of a floating/flexible exchange rate?

Back 84

-Supply and Demand determine the exchange rate
-(Non-official players-->ignore central banks)
-Equivalent to perfectly competitive markets

Front 85

Qualities of Managed float/Dirty float

Back 85

-monetary authorities intervene when "necessary"

Front 86

Qualities of Fixed/Pegged exchange rate

Back 86

Govt determines the exchange rate

Front 87

In this instance of a sudden supply shock of the Chinese supply of US$, what does "A" represent?

Back 87

A represents the excess demand for $ to be supplied by Chinese govt

Front 88

What if the govt did nothing?

Back 88

the $ would appreciate and yuan depreciate

Front 89

Graph a pegged exchange rate where there is an excess supply of $ to Chinese yuan

Back 89

the lowest desired value of the $ (9 yuan/$) is ABOVE the market exchange rate

Front 90

What does the excess supply of $ mean in terms of the U.S. BOP?

Back 90

excess supply of $ (length "A") represents a deficit in CA & FA of U.S. in relation to China

Front 91

If the Chinese govt has an excess supply of $ relative to their pegged rate, why wouldn't they sell it?

Back 91

1. US$ held by Chinese govt mostly overnight deposits; opp. cost of holding these low-interest rate $ is pretty high
2.) Chinese govt buys up US$ by selling yuan by putting more yuan on market, inflates their currency (inflating Chinese Money supply)

Front 92

In maintaining pegged rate, what is the problem if foreign govt has to sell $?

Back 92

may run out

Front 93

In maintaining pegged rate, what is the problem if foreign govt has to buy $?

Back 93

could be inflationary

Front 94

When is a pegged exchange rate sustainable?

Back 94

if shifts in S&D "cancel out" over time

Front 95

What does exchange control do?

Back 95

kind of short circuit S&D all together

Front 96

Graph instance of exchange control

Back 96

E bar = pegged exchange rate

Front 97

With exchange control, what administrative body is needed?

Back 97

currency board

Front 98

how does exchange control work?

Back 98

any local resident who earns $ is required by law to bring those $ to the currency board and the currency board will give E bar back
the currency board determines who gets to exchange, and at what rate

Front 99

Problems with currency board

Back 99

since foreign exchange earnings are distributed in bureaucratic manner, inefficient and scope for corruption

Front 100

What is the "Parallel Market"

Back 100

in situation of exchange control, non-official channel where govt "allows" but not quite fully legal

Front 101

Graph world wealth and international lending for the case of a world with 2 countries with Japan having 80% world wealth and US 20%

Back 101

Marginal Product of Capital vs. Quantity for both Japan and US

Front 102

What does Q* represent?

Back 102

Q* represnts if there is no trade in wealth//no intl trading lending/borrowing

Front 103

What do W and Y represent

Back 103

Percentage of world wealth held by each country:
W = 80% wealth posessed by Japan
Y = 20% wealth posessed by US

Front 104

What do X and V represent?

Back 104

Return on investment for each respective country:
X --> Japan
V--> USA

Front 105

If Z=10%, what does it represent?

Back 105

Japanese loan 10% of world wealth to USA
the percentage is the amount Q* to point where the two MPKs intersect: marginal return is same in both countries
most efficient outcome, net increase in world output

Front 106

What is C?

Back 106

the net increase in world output if Japan loans the % of its world wealth to the US where the marginal return is same for both countries (intersection of two MPKs)

Front 107

Graph the costs/benefits of default on debt

Back 107

Two lines: cost of default and Benefit of default (1+i)D

Front 108

What is the significance of D bar?

Back 108

For any point D, if D<Dbar then country will pay back loan
If D>Dbar then country will default

Front 109

What is the benefit of defaulting on a loan?

Back 109

-less interest rate to pay back
the more you borrow, the bigger the benefits

Front 110

what are the costs of defaulting?

Back 110

-let's assume cost of defaulting not really associated with amt borrowed
-loss of repuration, seized assets, etc.

Front 111

What would the graph of costs/benefits of default look like with interest rate shock?

Back 111

interest rate shock (increase in i)

Front 112

What are two categories of macroeconomic goals/objectives?

Back 112

Internal and External Balance

Front 113

What are characteristics of Internal balance?

Back 113

1. Full employment
2. Price stability (low rate of inflation; predictable rate of inflation)
3. Reasonable economic growth (higher SOL in future)

Front 114

What are characteristics of External balance?

Back 114

1. "Reasonable" balance in current account (debatable)
2. (OR) CA+FA=O (Normally CA+FA+OR=0; therefore, implication that balanced w/o govt intervention)
3. (OR) "Appropriate" value of currency on FX market

Front 115

What are the govt tools to achieve macroeconomic goals?

Back 115

1. Fiscal policy (use of govt spending and taxes to influence economic activity)
2. Monetary policy (control of money supply [M1,M2] to influence economic activity)
3. Exchange rate policy (Govt directly influence value of currency)
*Note: we may find that it is not possible to do both Monetary and Exchange rate policy simulateously

Front 116

What are the endogenous variables?

Back 116

Interest rate(i), Income(Y), and in later versions Price level(P), Exchange rate(e)

Front 117

What are the exogenous variables?

Back 117

Money Supply, Govt Spending(G), Taxes(T)

Front 118

What does Y(income) depend on?

Back 118

i (interest rate)

Front 119

what happens when i decreases (in relation to Y)

Back 119

interest-sensitive items increase-->income goes up

Front 120

what are examples of interest-sensitive items?

Back 120

consumer durables (cars)
investment

Front 121

IS(Investment-Saving)?

Back 121

All combinations of i & Y that equate desired saving with desired investment
"equilibrium & goods market"

Front 122

what happens as income(Y) increases?

Back 122

drives up interest rates --> want to hold lower share of wealth in form of "money"

Front 123

What is "Money"

Back 123

non-interest bearing assets
(DOES NOT EARN interest)

Front 124

What does the share held in money depend on?

Back 124

the interest rate; when i increases, (M/P)d decreases (Money demand, the amt we want to hold in money, decreases)

Front 125

Since interest rates go up as income increases, graph rltnsp between interest rate and money demand...effects?

Back 125

As income goes up, interest rates go up, want more wealth in form of money (higher money demand)

Front 126

Graph Money liquidity when Y2>Y1

Back 126

Higher income represented in upwards shift of Liquidy/Money Demand curve
Higher interest rate

Front 127

Why is the MS curve vertical?

Back 127

Vertical since it is an EXOGENOUS variable

Front 128

Graph and define the LM curve

Back 128

LM: All combinations of i and Y that lead to equilibrium in Money Market [Where L(Y) = MS]

Front 129

Graph Equilibrium in goods and money market simultaneously

Back 129

intersection is EQ

Front 130

If you're at Y bar (intersection between IS and LM) does that mean it is the best?

Back 130

not necessarily desired outcome

Front 131

What are the rltnsps between CA, FA, Y, and i?

Back 131

CA depends on Y (As income increases we want to buy more of everything, including imported goods)
FA depends on i(As i increases, better opportunity for foreigners in US-->Financial inflow so FA increases)

Front 132

Y and CA?

Back 132

Inverse relationship

Front 133

i and FA?

Back 133

i increases, FA increases

Front 134

What do we want for CA and FA?

Back 134

We want CA+FA=0

Front 135

Graph and define the FE curve

Back 135

FE: Normally BP -Balance of Payments Curve)
All combinations of i & Y such that CA+FA=0

Front 136

What do X and Z represent?

Back 136

X: CA+FA>0
Y: CA+FA<0

Front 137

slope of the FE curve?

Back 137

upward sloping: the two extremes are vertical and horizontal

Front 138

What are the exogenous variables to the IS-LM model?

Back 138

Money Suply, Planned investment, Govt. Spending, Taxes, exchange rate, exports, price levels

Front 139

IS-LM: Show graphically the effects of increase in MS

Back 139

LM curve shifts down and to the right
Y increases
i decreases

Front 140

IS-LM: Graphically show effects of exogenous increase in spending

Back 140

Exogenous increase in spending = (increase in G and/or I, and/or Xexports)
i increases
Y increases

Front 141

What causes the same effect as an exogenous increase in spending?

Back 141

same effect if decrease taxes and/or dollar depreciates

Front 142

Compare and contrast expansionary policy for fiscal/monetary policy

Back 142

Expansionary policy tends to increase income regardless of whether monetary or fixed
BUT expansionary monetary policy works to drive i DOWN
expansionary fiscal policy works to drive i UP

Front 143

What does an increase/decrease in "i" effect in rltnsp to intl economics?

Back 143

increase/decrease in i has different implications for the exchange rate

Front 144

What is the terminology for "CA+FA"?

Back 144

"CA+FA" = "Official Settlements Balance

Front 145

When is the official settlements balance naturally = 0?

Back 145

if there is a truly free floating exchange rate, then by definition CA+FA=0

Front 146

Graph and define the FE curve in terms of the official settlements balance

Back 146

FE: All combinations of i, Y where official settlements Balance = 0
CA+FA=0

Front 147

What does the position of FE depend on?

Back 147

exogenous variables...particularly the EXCHANGE RATE

Front 148

Show the graph and equation for effects on exchange rate and FE curve of increase in "e(d/f)"

Back 148

dollar depreciates, lower interest rate to attract investment, increase output

Front 149

Graph simultaneous internal and external balance

Back 149

Official Settlements Balance = 0
IS=LM
Y=Yfull

Front 150

Graph example of when CA+FA<0

Back 150

Note: FE curve crosses ABOVE the equilibrium (i.e. our IS-LM EQ is on the RIGHT hand side of FE)

Front 151

Graph effects of a fixed exchange rate between the US$ and pesos where the US Demand for peso > US supply of pesos

Back 151

e = $/peso
Deficit in official settlements means Americans want more foreign "stuff" than foreigners want US "stuff"

Front 152

What does "A" represent

Back 152

A = Qpesos US Fed has to supply

Front 153

What is the rltnsp between central bank selling foreign currency to maintain exchange rate on domestic MS?

Back 153

When central bank sells pesos, they are collecting USD$
Dollars are pulled out of circulation; Money Supply FALLS

Front 154

Graph IS-LM, FE to show instance where Feds sell money to reduce MS

Back 154

IS-LM equil. to the right of FE; official settlements balance<0

Front 155

Graph how the MS continues to shrink until official settlements balance is elminated

Back 155

Remember, reduction in MS is reflected in shift to the left of LM curve
LM curve shifts continue until reach 3-way EQ

Front 156

What happens to a country's control over its money supply when it fixes/pegs its exchange rate?

Back 156

it gives up control of its money supply because of having to accomodate for deficits/surpluses in the official settlements balance

Front 157

What is the monetary response to a deficit in the official settlements balance?

Back 157

decrease MS

Front 158

what is the monetary response to a surplus in official settlements balance?

Back 158

increase MS

Front 159

What is "sterilization"?

Back 159

Attempt to use domestic MONEY SUPPLY operations to undo effect of FX operations

Front 160

Graph an attempt to increase money supply to stimulate income (moving away from EQ)

Back 160

reduces interest rate (downward pressure on value of domestic currency)
Buy domestic currency ($) to keep value from falling
Shrinks money supply back

Front 161

What effect does a decrease in the interest rate have on the exchange rate?

Back 161

decrease in interest rate has a downward pressure on the value of domestic currency

Front 162

What is the monetary policy response to downward pressure on value of domestic currency?

Back 162

buying domestic currency to keep value from falling, which decreases MS

Front 163

What is the solution for an economy with downward pressure on value of currency so money supply is shrinking AND excessive unemployment?

Back 163

fiscal policy

Front 164

Graph IS, LM, FE when there is NO international capital mobility

Back 164

Sterlizied intevention is possible
some control over money upply for some time horizon

Front 165

Graph IS, LM, FE with Perfect Capital Mobility

Back 165

Absolutely zero control over money supply (not even for an instant)

Front 166

What is the reality of capital mobility?

Back 166

capital mobility is not infinite, but fairly high

Front 167

What does it mean to be left of FE curve for D$, S$, OR, official statements balance?

Back 167

D$>S$
positive OR
official statements balance > 0

Front 168

If we wanted to raise Y to Yfull with fiscal policy, why wouldn't we have to push the IS curve all the way out to where IS-LM=Yfull?

Back 168

With international trade, the federal reserve makes up for the extra amount through OR; this automatically increases MS which pushes LM to the right

Front 169

Graph using fiscal policy to raise Y to Yfull (fixed exchange rates)

Back 169

Note: FE curve here is drawn flatter than LM curve
exogenous policy: (i.e. lower T to push IS right)
endogenous response: MS increases --> LM shifts to right

Front 170

Show using fiscal policy to increase Y with perfect capital mobility

Back 170

0 crowding out of investment
0 increase in interest rate
***Here, fiscal policy is at its strongest

Front 171

Graph fiscal policy to raise Y with no capital mobility

Back 171

1. IS shifts right
2. Now end up at right side of FE; CA deficit, FA 0 by definition of no capital mobility
3. $D<$S --> LM shifts left as fed decreases MS
Perfect crowding out of investment
Income stays the same, interest rate increases
for every dollar spent on fiscal, dollar taken out of I

Front 172

When the D$<S$, what is the Fed's response?

Back 172

The Fed has to buy up $ on Fx mkt to keep value of $ from decreasing

Front 173

How effective is fiscal policy in changing income if exchange rate is fixed with NO capital mobility?

Back 173

expansionary fiscal policy can give temporary raise in income, but in the end it is not sustainable since it triggers increase in interest rate due to monetary policy and crowds out investment

Front 174

Effectiveness of fiscal policy in changing income if exchange rate is fixed and Perfect Capital Mobility?

Back 174

fiscal policy is super-effective
no crowding out of investment
no increase in interest rate

Front 175

Effectiveness of fiscal policy in changing income if exchange rate is fixed and Intermediate Capital Mobility?

Back 175

depends on the relative slope of FE & LM curve

Front 176

Why does it matter whether the FE or LM curve is steeper?

Back 176

it matters because it determines what side of FE you are at if push IS curve out (since it determines monetary policy)

Front 177

What are two types of Intermediate Capital Mobility?

Back 177

1. Relatively immobile capital
2. Relatively mobile capital

Front 178

Which of the two types of Intermediate Capital mobility do most people think is reflective of US and most western countries?

Back 178

Relatively mobile capital

Front 179

Graph and describe corresponding monetary policy with expansionary fiscal policy, fixed exchange rate and relatively immobile capital

Back 179

FE steeper than LM
Official reserves deficit
there will be endogenous CONTRACTION of MS

Front 180

Graph and describe corresponding monetary policy with an expansionary fiscal policy, fxd exchange rate, and relatively mobile capital

Back 180

FE flatter than LM
official reserves surplus
There will be endogenous increase in MS

Front 181

Graph and describe official statements balance with a floating exchange rate

Back 181

At Eo, CA+FA=0
By assumption of pure float, NO official reserve transactions
the exchange rate will automatically adjust so that OR=0

Front 182

(Floating Exchange) If the dollar depreciates, what happens to import/exports?

Back 182

U.S. goods/services more attractive, so export more, import less

Front 183

Why does the FE curve shift with new exchange rate?

Back 183

External Balance: CA+FA=0
Internal Balance: maintain full employment at price stability
Pick out any combination(i,Y) I will find some exchange rate that will cause the external balance line to go through that point-->at ANY point

Front 184

Effectiveness of fiscal/monetary policy with fixed vs. flexible exchange rate

Back 184

Fixed rate: Monetary policy weak; fiscal policy strong
Flexible rate: Monetary policy effective; fiscal policy weak

Front 185

Show effects of expansionary monetary policy with flexible exchange rate and relatively mobile capital

Back 185

1. MS increases
2. $ depreciates
3. IS curve shifts right
4. FE curve shifts so new equilibrium with external and internal balance

Front 186

Graphically show how we get the IS curve in terms of CA=NS-I

Back 186

At any interest rate(holding investment constant) income is higher
that means depreciation of $ shifts IS curve to the right

Front 187

Show effects of expansionary fiscal policy with flexible exchange rate and relatively mobile capital

Back 187

1. Expansionary fiscal policy pushes IS to right
2. Causes i to increase
3. $ appreciates(left of FE)
4. higher value of dollar pushes IS curve back

Front 188

Graph depreciation of Dollar, describe effects on CA and import/exports

Back 188

When dollar depreciates, has effect on CA (import less, export more) CA increases

Front 189

What is the covered interest differential?

Back 189

the difference between the overall covered return to investing in pound-denominated assets(F+iuk) and the return to investing in dollar-denominated assets(ius)

Front 190

What is the expected uncovered interest differential(EUD)?

Back 190

expected overall uncovered return

Front 191

How could a govt whose fixed exchange rate overvalues its currency use domestic interest rates to defend the pegged exchange rate?

Back 191

in order to defend the pegged rate, the govt could increase domestic interest rates, shifting the incentives for international capital flows toward investments in that country's bonds (i.e. demand for domestic currency increases)

Front 192

What is "speculating"?

Back 192

the act of taking a net asset position("long") or a net liability position("short") in some asset class, here a foreign currency

Front 193

Describe hedging with forward exchange contract

Back 193

forward exchange contract: let's say expecting Xlbs in 60 days, enter into 60 day future exchange rate to guarantee amt will have to sell in lbs and receive in $$ (and vice versa)