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35 Cards in this Set
- Front
- Back
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Current Account
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illustrates the current trade flows
a. When it is positive - we are exporting more than importing b. Negative- importing more than exporting |
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Capital account
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illustrates international trade flows of the country
a. Negative- we are holding more investments abroad than foreigners hold in our country b. Positive- foreigners holding more investments in our country than we hold in theirs |
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Spot transactions
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the immediate (two-day) exchange of bank deposits
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forward transactions
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the exchange of bank deposits at some future specified date
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appreciation
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increase in currency value
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depreciation
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decrease in currency value
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Pros of Appreciating dollar
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Exporters can sell abroad more easily
Less competition for US firms from imports Foreign tourism is encouraged US capital markets more attractive |
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Cons of appreciating dollar
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Higher prices on imports
Upward pressure on inflation Travel abroad is more expensive Harder for US firms to expand into foreign markets |
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4 factors that affect exchange rates in the long run
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a. Relative price levels
i) When american prices rise, demand for american goods declines and the dollar tends to depreciate so that american goods can still sell well. A fall in price level causes currency to appreciate b. Tariffs and quotas i) Increasing trade barriers cause a country’s currency to appreciate in the long run c. Preferences for domestic vs. foreign goods i) Increase in american goods tends to appreciate the dollar d. Productivity i) As a country becomes more productive, its currency tends to appreciate |
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Law of one price
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and traded good going through the exchange rate should equal in value
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Purchasing power parity
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1) Assumes that all goods are identical in both countries
2) Trade barriers and transportation costs are low 3) Many goods and services are not traded across borders 4) States that if the countries domestic price level increases by 10%, then the domestic currency will decrease by 10% |
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Problems of Purchasing power parity
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a. All good are not identical in all countries (chevy vs. toyota)
b. Many goods and services are not traded |
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Factors affecting exchange rates in the short run
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a. Consumer preferences for domestic or foreign goods
b. Inflation relative to trading partners c. Real income of consumers d. Real interest rates e. Productivity changes f. Risk and profitability of investments g. Product availability h. Monetary policy and fiscal policy i. Government trade policy Opinion about future exchange rates |
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monetary neutrality
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in the long run, a one-time percentage rise in the money supply is matched by the same one time percentage rise in the price level, leaving unchanged the real money supply and all other economic variables such as interest rates
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Exchange rate overshooting
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the exchange rate falls by more in the short run than it does in the long run when the money supply increases
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dirty float
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a. An exchange rate system in which currency values are determined by market forces and by periodic government intervention in the foreign exchange markets
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clean float
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a. An exchange rate system in which currency values are determined only by market forces
b. Government does not interfere |
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fixed exchange rate
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1) A system where a nations currency is set at a fixed rate relative to all other currencies, and central banks intervene in the foreign exchange market to maintain the fixed rate
2) Overvaluation occurs when a currencys current price, in terms of other currencies, is above the equilibrium price Underevaluation when a currencys current price, in terms of other currencies, is below the equilibrium price |
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the gold standard
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1) Nations money supply is tied to gold
2) Convertability from gold to paper money and papermoney to gold |
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advantages of gold standard
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a. Eliminates foreign exchange risk
b. Constraint on monetary authorities |
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disadvantages of gold standard
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a. World inflation determined on gold production
b. Country on gold standard loses control of Ms |
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Gold standard from classical view when US Sends gold to UK (US) perspective
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money supply goes down
price goes down exports increase imports decrease |
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Gold standard from classical view when US sends gold to UK (UK perspective)
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Money supply goes up
prices go up imports increase Exports decrease |
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Gold standard from Keynesian view when US send gold to UK
US perspective |
interest rate goes up
investment is down Aggregate demand decreases GDP decrease imports down |
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Gold standard from Keynesian view when US send gold to UK
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interest rate down
investment up Aggregate demand increase GDP up Imports up |
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Types of fixed exchange rate systems
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1) Fixed Peg
2) Crawling Peg 3) Fixed Peg with bands 4) Currency board 5) Dollarization |
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Bretton Woods
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1) International monetary system set up in 1944
2) Established fixed exchange rates a. Agreed to peg currencies to the US dollar that is convertible to gold at $35/oz 3) Set up the new world order 4) Set up the IMF |
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IMF
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a. Deals with financial disasters and balance of payments problems between nations
b. Aims to stabilize the international monetary system and help when monetary flow from trade cause problems c. Provides help and advice as well as funds to countries experiencing balance of payments problems |
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World Bank
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a. UN agency
b. Development projects with developing countries or poor countries |
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unsterilized foreign exchange system
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a. Purchase of domestic currency with foreign reserve assets
i) Decreases the monetary base by that amount |
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sterilized foreign exchange intervention
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Does not affect the monetary base
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interest parity
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1) The assets are perfect substitutes
2) Domestic interest rates equal the foreign interest rates minus the expected appreciation of the domestic currency 3) Expected returns are the same on both domestic and foreign assets 4) Equilibrium condition |
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managed float or foreign exchange intervention
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1) If Fed purchases pound with dollars, it will appreciate the pound and depreciate the dollar
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bond market demand shifter
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a. Wealth
i) Economy grows, wealth increases, bond demand increases b. Expected return c. Risk d. Liquidity i) The more liquid, the higher the demand ii) If other assets become less liquid, increases demand |
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bond market supply shifters
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a. Profitability of investment opportunities
b. Expected inflation c. Government activities - government deficits increases supply |
