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macroeconomics > Chapter 9 > Flashcards

Chapter 9 Flashcards

1
Q

What is the Foreign Exchange Market?

A

The market in which the currency of one country is exchanged for the currency of another

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2
Q

What is a foreign exchange rate?

A

The price at which one currency exchanges for another

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3
Q

What is currency depreciation?

A

A fall in the value of one currency in terms of another currency

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4
Q

What is currency appreciation?

A

A rise in value of one currency in terms of another currency

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5
Q

How is the exchange rate determined?

A

By the foreign exchange market

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6
Q

How does the expected future exchange rate effect the Supply of CAD?

A

Expected future exchange rate ↑ - Supply of CAD ↓

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7
Q

What is the demand for one currency?

A

The supply of another currency

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8
Q

What is the Interest Rate Differential?

A

Interest rate Canada - Interest rate rest of world

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9
Q

What does the demand for Canadian currency depend on?

A
  1. The exchange rate
  2. World demand for Canada’s exports
  3. Interest rate in Canada compared to rest of the world (interest rate differential)
  4. The expected future exchange rate
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10
Q

What is the law of demand for foreign exchange?

A

The higher the exchange rate, the smaller is the quantity of Canadian dollars demanded in the foreign exchange market

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11
Q

How does the exchange rate influence the quantity of Canadian dollars demanded?

A

Exports effect
Expected profit effect

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12
Q

What is the Exports Effect?

A

Exchange rate ↓ - Value of Canadian exports ↑ - Qd CAD ↑

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13
Q

What is the Expected Profit Effect?

A

Exchange rate today ↓ - expected profit from buying Canadian dollars ↑ - Qd CAD ↑

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14
Q

What does the supply of Canadian currency depend on?

A
  1. The exchange rate
  2. Canadian demand for imports
  3. Interest rates in Canada and other countries (interest rate differential)
  4. The expected future exchange rate
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15
Q

What is the law of supply

A

The higher the exchange rate, the greater is the quantity of Canadian dollars supplied in the foreign exchange market

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16
Q

How does the exchange rate influence the quantity supplied of Canadian dollars?

A
  1. Imports effect
  2. Expected profit effect
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17
Q

What is the imports effect?

A

Exchange rate ↑ - value of Canadian imports ↑ - Canadian dollars supplied ↑

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18
Q

What is the expected profit effect?

A

If the expected exchange rate ↑ - expected profit ↑ - Qs CAD ↓

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19
Q

What causes a change in Demand for CAD?

A
  1. World demand for Canadian Exports
  2. Interest rate differential
  3. Expected future exchange rate
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20
Q

How does the world demand for Canadian exports influence the Demand for CAD?

A

World demand for Canadian exports ↑ - Demand CAD ↑

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21
Q

How does the interest rate differential effect the Demand for CAD?

A

Canadian Interest Rate Differential ↑ - Demand CAD ↑

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22
Q

How does the expected future exchange rate effect the Demand for CAD?

A

Expected future exchange rate ↑ - Expected future profit ↑ - Demand CAD ↑

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23
Q

What factors create a change in the Supply of CAD?

A
  1. Canadian demand for imports
  2. Interest rate differential
  3. Expected future exchange rate
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24
Q

How does Canadian demand for imports effect the supply of CAD?

A

Demand for Imports ↑ - Supply of CAD ↑

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25
Q

How does the interest rate differential effect the supply of CAD?

A

Interest rate differential ↑ - Supply of CAD ↓

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26
Q

How does the expected future exchange rate effect the Supply of CAD?

A

Expected future exchange rate ↑ - Supply of CAD ↓

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27
Q

What is Arbitrage?

A

The practice of seeking to profit by buying in
one market and selling for a higher price in another related market

28
Q

What outcomes does Arbitrage achieve in the foreign exchange market?

A

The law of one price
No round-trip profit
Interest rate parity
Purchasing Power Parity

29
Q

What is the law of one price?

A

If an item can be traded in more the one place, the price will be the same in all locations

30
Q

What is no round-trip profit?

A

A round trip is using the currency A to buy currency B, and then using B to buy A. Arbitrage removes profit from all transactions of this type

31
Q

What is the return on a currency?

A

The interest rate on that currency plus the expected rate of appreciation over a given period

32
Q

What is interest rate parity?

A

When the return on two currencies are equal

33
Q

What is purchasing power parity?

A

When 2 quantities of money buy the same quantity of goods and services

34
Q

What is speculation?

A

The expectation of making a profit

35
Q

What is the Real Exchange Rate?

A

The relative price of Canadian-produced goods and services to foreign-produced goods and services
OR
The quantity of real GDP of other countries that a unit of Canadian real GDP buys

36
Q

What is the equation for Real Exchange Rate?

A

(E × P)/P*
E = Exchange Rate
P = Canadian price level
P* = Price level of foreign country

37
Q

Does a change in the quantity of money affect the exchange rate?

A

Yes

38
Q

What are the 3 possible exchange rate policies?

A
  1. Flexible Exchange Rate
  2. Fixed Exchange Rate
  3. Crawling Peg
39
Q

What is Flexible Exchange Rate policy?

A

Exchange rate is decided by market

40
Q

What is Fixed Exchange Rate policy?

A

It pegs the exchange rate at a value decided by the government or central bank

41
Q

How do governments pursue Fixed Exchange Rate policy?

A

If E > Target → Government SUPPLIES (sells) CAD (aka buys a foreign currency with CAD)
If E < Target → Government DEMANDS (buys) CAD (aka buys CAD with foreign currency kept in reserves)

42
Q

What is a Crawling Peg Exchange Rate policy?

A

Fixed exchange rate BUT target changes
Helps avoid wild swings

43
Q

What does a country’s balance of payments account record?

A

International:
- Trading
- Lending
- Borrowing

44
Q

What are the 3 balance of payments accounts?

A
  1. Current Account
  2. Capital and Financial Account
  3. Official Settlements Account
45
Q

What does the Current Account record?

A

= NET Exports
+ Net interest paid abroad
+ Net transfers

46
Q

What does the Capital and Financial Account record?

A

= Foreign investment in Canada
- Canadian investment abroad

47
Q

What does the Official Settlements Account record?

A

The change in Canadian official reserves

48
Q

What are the Canadian Official Reserves?

A

Government’s holdings of foreign currency
if COR ↑ - Official Settlements Account is more negative

49
Q

What does the sum of; Current Accounts + Capital and Financial Account + Official Settlements Account; ALWAYS EQUAL

A

0

50
Q

Current Accounts + Capital and Financial Accounts + Official Settlements Account =

A

0
INGRAIN THIS IN MEMORY, PROF SAYS #1 THING PEOPLE LOSE MARKS IN FINAL

51
Q

What is a Net Borrower?

A

A country that borrows more from the rest of the world than it lends

52
Q

What is a Net Lender?

A

A country that lends more to the rest of the world than it borrows

53
Q

What country do funds flow into, and what country do they flow out of?

A

The country in which the real interest rate is the highest, and out from the country in which the real interest rate is the lowest

54
Q

Is the loanable funds market GLOBAL or NATIONAL?

A

Global. Duh

55
Q

How does a country’s loanable funds market connect to the global market?

A

Through Net Exports

56
Q

If a country’s net exports are NEGATIVE which is larger:
World’s supply of funds OR Funds supplied to world?
Quantity of Loanable Funds OR National Savings?

A

World’s supply of funds to the country is higher
Quantity of loanable funds is higher

57
Q

If a country’s net exports are POSITIVE which is larger:
World’s supply of funds OR Funds supplied to world?
Quantity of Loanable Funds OR National Savings?

A

Funds supplied to the rest of the world is higher
National savings is higher

58
Q

What is a debtor nation?

A

A country that during its entire history has borrowed more from the rest of the world than it has lent to it

59
Q

What is a creditor nation?

A

A country that has invested more in the rest of the world than other countries have invested in it

60
Q

What is the Current Account Balance?

A

Net Exports + Net interest income + Net transfers

61
Q

What is the Government Sector surplus or deficit equal to?

A

Net Taxes - Gov. Expenditure
T - G

62
Q

What is the Private Sector surplus or deficit equal to?

A

Saving - Investment
S - I

63
Q

What is Net Exports equal to in CAB?

A

NX = (T - G) + (S - I)

64
Q

How does the Exchange rate effect the CAB in the Short Run?

A

Nominal Exchange Rate ↓ - Current Account Deficit ↓

65
Q

How does the Exchange rate effect the CAB in the Long Run?

A

Nominal Exchange Rate ↓ - Real Exchange Rate does not change - Current Account Balance does not change

macroeconomics (12 decks)

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