Chapter 13 - OPEN ECONOMY MACROECONOMICS Flashcards
What price balances the supply and demand in the market for foreign-currency exchange?
Real exchange rate
In the market for loanable funds, where do the supply and demand come from and what balance this?
supply comes from national saving (S),
demand comes from domestic investment (I) and net capital outflow (NCO),
and the real interest rate balances supply and demand.
In the market for foreign-currency exchange, where do the supply and demand come from and what balance this?
supply comes from NCO, demand comes from net exports (NX), and the real exchange rate balances supply and demand.
What is a Tariff?
A tax on imported goods.
What is Import quota?
A limit on the quantity of a good produced abroad that can be sold domestically.
What is a capital flight?
A large and sudden reduction in the demand for assets located in a country
How should the Loanable funds market be interpreted?
As the domestically generated flow of resources available for capital accumulation.
Why does the market for foreign exchange exists?
because people want to trade goods, services, and financial assets with people in other countries, but they want to be paid for these things in their own currency.
What are the Assumptions for a small open economy model?
- The level of GDP is given.
- The price level is fixed.
- This one is important! The real interest rate is equal to the world interest rate and is taken as given.
Why is the NCO vertical in the loanable funds market?
Supply of dollars is determined in the loanable funds market by NCO. It is not affected by changes in exchange rate; hence it is vertical.
