Econ 1020 2015 Final

Front 1

A Bank is insolvent When:

Back 1

It has negative equity

Front 2

How do a decrease in interest rates effect the exports and hence the cab of a country

Back 2

Interest rates decreasing decrease desire of overseas investors, hence the exchange rate relative to other currencies drop, increasing exports and decreasing imports. Cab = Primary + NX Nx^ so increase CAB.

Front 3

What does fractional banking refer to.

Back 3

Banks hold small fraction of deposits as liquid assets.

Front 4

What is a bail in

Back 4

Where bank's depositors are made to convert their loans into equity(shares etc..)

Front 5

What do bank reserves include:

Back 5

Cash that bank keeps in the vault.

Front 6

What is bartering:

Back 6

The exchange of a good for another good, many issues with this. etc. double coincidence of wants.

Front 7

What is potential GDP

Back 7

Its long run trend gdp value

Front 8

What does a positive output gap infer about the current state of the economy

Back 8

The inflation rate is likely to go up as workers will bargain for higher wages.

Front 9

In the long run what does a decrease in money supply do?

Back 9

Decrease in nominal GDP

Front 10

What does a higher growth rate of money supply lead to?

Back 10

It leads to higher inflation, prices will be adjusted as more money will be worth less.

Front 11

How is the nominal interest rate of a country calculated.

Back 11

Nominal interest=Real Interest + Inflation

Front 12

What will an open market sale by RBA reduce that the RBA has holdings of

Back 12

Securities such as commonwealth government bonds.

Front 13

What happens when the reserve bank raises the cash rate.

Back 13

Increase the interest rates so consumption will decrease.

Front 14

When is expansionary monetary policy less effective?

Back 14

When the bank is not willing to make more loans.

Front 15

Does monetary policy effect ad and as

Back 15

No it only has the ability to affect AD, demand sided policy with a time lag.

Front 16

What is the RBA's inflation target.

Back 16

2-3% per annum, over a business cycle.

Front 17

What are asset prices affected by.

Back 17

Interest Rates,

Expected income stream of the assets

Perceived riskiness of the income stream of the assets

Perceived prospect of capital gain

Front 18

What has QE led to in US.

Back 18

The us money supply to rise

Front 19

If the government wants to use reserve requirement to ease inflation it will:

Back 19

Increase the reserve to deposit ratio.

Front 20

What is a credit crunch

Back 20

Many banks are reluctant to make new loans

Front 21

What does the term crowding out refer to:

Back 21

When government increases spending.

Y=C+I+G+NX must still hold true so G Increases which means C+I+NX will decrease.

Front 22

What is the difference between headline and cor inflation.

Back 22

CPI Inflation is headline inflation.

More concerned with core or underlying inflation, which is inflation after stripping out temporary price fluctuations.

Front 23

What are OMO

Back 23

Open market operations, which is the RBA purchasing or selling financial instruments.

Front 24

What is an exchange settlement account.

Back 24

Banks have deposit with the RBA called ESA, allows dealings between RBA and governments on behalf of banks.

ESA make up part of a banks reserves, the rest is what they keep in the vault.

Front 25

What is the cash rate

Back 25

Interest rate within the IMM.

Front 26

What kind of interest rate can the RBA control with OMO's

Back 26

Only the very short run nominal interest rates.

Front 27

How do interest rates effect consumption?

Back 27

Income Effect: Net borrowers have higher lifetime income when interest rates higher, so consume more, whereas net savers are the opposite.

Substitution effect, Consumption may be shifted forward as more people will save with higher interest.

Front 28

How do interest rates effect investment?

Back 28

Higher rates mean higher costs of borrowing, lower investment

Lower share prices, reducing capital firms can raise

High borrowing costs also deter people from investing in houses

Front 29

How do Interest rates effect net exports.

Back 29

Higher interest rates will cause more people who want to invest in AUS, so the demand for AUD will go up and the AUD will appreciate against other countries, decreasing exports and increasing imports

Front 30

What effect does an increase in real interest rate have on AD

Back 30

Ad will decrease, Monetary Policy can only effect AD side.

Front 31

How long is the Time lag for monetary policy

Back 31

It is about 6 months before any efffects are seen

Front 32

What determines the effectiveness of monetary policy

Back 32

Firms and consumers respond to interest rate changes

Net exports respond to changes in exchange rate

Front 33

For EMP to work what do banks have to do

Back 33

They have to be willing to expand credit.

Banks may not be willing to lend.

Front 34

What are the three components of the balance of payments?

Back 34

Current Account Balance

Financial Account Balance

Capital Account Balance

Front 35

What does the current Account Include

Back 35

Net Exports + Net Primary Income + Net Secondary Income

Front 36

How are net exports defined in the Current Account

Back 36

Net Exports = Value of goods Aus exports - Value of goods imported

Front 37

How is Net Primary Income Defined

Back 37

Income received by Aus residents from investments in other countries - Income paid to people who have investments in Australia who are foreigners

Front 38

What is the rule of thumb way to determine if something is positive or negative in the BOP

Back 38

If it is money coming into Australia then it is typically positive, if it is money flowing out it is negative

Front 39

How is net secondary income defined

Back 39

Transfers received by AUS residents from other countries minus transfers made

Front 40

What does the Financial Account Balance Include?

Back 40

Foreign Purchases of physical and financial assets in AUS, minus Aus purchases of physical and foreign assets in foreign countries

Front 41

What does the Financial Account Balance Equal

Back 41

Measure of net Inbound Foreign Investment

It is Equal to Inbound Foreign Investment(Investment in Aus by foreign) - Outbound Foreign Investment(Investment in foreign by AUS)

Front 42

What can foreign Investment Include

Back 42

FDI: Foreign Direct Investment

Foreign Portfolio Investment

Reserve Asset

Front 43

What is the balance of Payment Identity

Back 43

BOP=CAB+FAB+KAB==0

Front 44

What is the situation with Australias Current Account Balance Deficit.

Back 44

Australia, lots of resources but small population and a low saving rate, hence domestic savings aren't enough to maintain high level of domestic investment required for economic growth. Relies on foreign capital to fill the saving gap.

Front 45

IS Ca Deficit a problem

Back 45

Have to be financed either by selling assets to foreign investors or by borrowing from overseas.

Front 46

What are the disadvantages of foreign borrowing

Back 46

Increase interest payment in the future, adds to future CA deficits

Need to make debt and interest payment even in economic downturn

Debt size could increase if debt is denominated in foreign currencies and the domestic currency depreciates

High debt to GDP might lead to lower credit rating

Front 47

What are the disadvantages of Selling Assets

Back 47

Dividends on those foreign investments will add to the future current account deficits (Negative net primary income entry)

Front 48

What is a Nominal exhange rate

Back 48

The value of one country's currency in terms of another country's currency

Front 49

What does Pounds/Dollar mean

Back 49

It is how many pounds someone could purchase with one dollar

Front 50

What is the foreign Exchange market

Back 50

A place where currencies are traded for other currencies

Front 51

What are some sources of demand for AUD in the foreign exchange market?

Back 51

Foreign Firms and consumers who want to buy AUS products

Foreign firms and consumers who want to invest in AUS

Currency traders who believe AUD about to appreciate

Front 52

What are some sources of supply for AUD in the foreign exchange market?

Back 52

Australia firms and consumers who want to buy foreign products

Australian firms and consumers who want to invest overseas

Currency traders who believe aud about to depreciate

Front 53

What are some of the detrminants of the exchange rate between two countries in the short run

Back 53

Relative foreign demand for the two countries exports

Relative foreign demand for the two countries assets

Currency traders expectations of future value

Front 54

What happens if the home country appreciates against other currencies

Back 54

Exports become more expensive to foreign buyers

Imports become cheaper to AUS buyers

Net exports fall reducing the rate of increase of AE and GDP

Front 55

What is the bilateral nominal exchange rate

Back 55

The exchange rate considered only between two countries

Front 56

Why does the bilateral exchange rate not reflect countries trade competitiveness accurately.

Back 56

Nominal exchange rates against other trading partners

Front 57

What is the nominal Trade Weighted Index

Back 57

Measures value of currency against a basket of the currencies of the country's main trading partners

Front 58

How is real exchange Rate Calculated

Back 58

Nominal Exchange Rate *(Domestic Price Level/Foreign Price Level)

Nominal Exchange Rate = Units of foreign Currency/1 Unit of Home Currency

Front 59

What are the three different types of exchange rate systems

Back 59

Floating Exchange Rate

Managed Floating exchange rate

Fixed exchange Rate

Front 60

What is a floating exchange rate

Back 60

Exchange rates determined by the demand and supply of currencies in the FX market.

Front 61

What is a managed floating exchange rate

Back 61

Same as floating but with occasional CB and government intervention

Front 62

What is a fixed or pegged exchange rate system

Back 62

A country unilaterally keeps the value of its currency fixed against another(called anchor currency).

Front 63

Does it impact on the value of a currency if it is fixed or floating currency

Back 63

No, it will still be determined in the FX market.

Front 64

What is the difference between depreciation and devaluation

Back 64

Depreciation: Value of floating currency falls relative to another currency

Devaluation: Value of a fixed/pegged currency is lowered relative to another currency

Front 65

What are the benefits of a fixed/pegged system

Back 65

Facilitate international investment and trade, especially with anchor country

Fix foreign debt levels and repayments

Reduce fluctuations in import prices

Prohibit central bank from printing money excessively

Front 66

Costs of fixed/Pegged Exchange Rates

Back 66

Lose monetary policy independency

Open to speculative currency attack when it is overvalued

Front 67

Is a common currency good

Back 67

Makes buying and selling goods between member countries easier and cheaper

However lose independent monetary policy

And country in recession will not experience currency depreciation, which could revive net exports.

Front 68

What is the big mac index

Back 68

The US$ price of the big mac in different countries

Front 69

What is the law of one price

Back 69

The idea that a product should be sold at the same price everywhere when expressed in same currency, otherwise traders will profit

Front 70

What is the theory of PPP

Back 70

The long run exchange rates move to equalize the purchasing power of different currencies.

Front 71

How is the nominal exchange rate for two currencies found when PPP

Back 71

Long RUn Nominal Exchange Rate = (Foreign Price Level/Domestic Price Level)

Nominal Exchange rate = Units of foreign Currency/1 Unit of Home Currency