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macroeconomics > chapter 13 > Flashcards

chapter 13 Flashcards

1
Q

what are the 3 assumptions for a small open economy?

A

GDP is given
price levels are given
perfect mobility (r=r^w) and is given

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2
Q

what are the 2 main focuses our open economy model?

A

market for loanable funds
market for foreign exchange

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3
Q

what is the source of supply in the market for loanable funds?

A

national savings

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4
Q

what is the source of demand in the market for loanable funds?

A

domestic investment

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5
Q

what is the price of loanable funds in the loanable funds market?

A

real interest rate
(r=r^w)

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6
Q

in a open market economy, what determines the real interest rate?

A

the world interest rate

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7
Q

does national savings and domestic investment determine the real interest rate in an open economy loanable funds market?

A

no it does not, word interest rate is due to the perfect capital mobility

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8
Q

what happens when the world interest rate is above the natural equilibrium, for an open economy loanable funds market?

A

the NCO is positive (NCO=s-i >0)
all the demand from domestic investment is met by national savings and there is some left over national savings being lent out

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9
Q

what happens when the world interest rate is below the natural equilibrium, for an open market loanable funds market?

A

the NCO is negative (NCO=s-i<0)
there is not enough supply to match the demand for loanable funds so foreign savings used to fully meet demand

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10
Q

why does the market for foreign currency exist?

A

because people want to conduct international trade and investment activities that require people from different countries to exchange currencies

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11
Q

what do sellers in international markets prefer to be paid in?

A

their own local currency

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12
Q

when exporters and importers need to exchange currencies to pay for goods and services, what is this creating in the foreign exchange market?

A

demand for currency (NX)

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13
Q

when international investors/ savers need to exchange currencies to pay for foreign investment assets, what does this create in the exchange market?

A

supply for currency (NCO)

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14
Q

what is the source of supply in the foreign currency exchange markets?

A

net capital outflow (NCO)

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15
Q

what is the source of demand in the foreign currency exchange market?

A

net exports (NX)

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16
Q

what is the price for currency in the foreign currency exchange markets?

A

real exchange rate (e)

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17
Q

when the real exchange rate (E) goes down what does that mean in the foreign currency exchange market?

A

the direct exchange rate is going down there for the domestic currency is deprecating

18
Q

what are the 4 links between the foreign currency exchange market and the market for loanable funds?

A

national savings
domestic investment
net capital outflow
net exports

19
Q

how do policies and events affect a small open economy?

A

they cause a change in the world real interest rate

20
Q

what happens to borrowing and lending when the world interest rate decreases?

A

that means it becomes less attractive to lend than to borrow

21
Q

what are the 3 impacts of a lowering world interest rate to the loanable funds market and the foreign exchange market?

A

NCO decreases but is still positive (NCO=s-i>0)
supply of dollars is decreasing
domestic currency is appreciating

22
Q

what can governments do to stop the outflow of capital?

A

implement capital controls

23
Q

how do capital controls stop the outflow of capital?

A

it raises the cost of borrowing from the rest of the world (r= r^w+ capital controls)

24
Q

what are 3 policies that the government can use to stop the outflow of capital?

A

limiting foreign ownership
transaction tax
mandatory approvals

25
Q

what are 2 things that can impact the outflow of capital?

A

capital controls
political instability

26
Q

how can political instability stop the outflow of capital?

A

it raises the cost of borrowing from the rest of the world due to risks of investing in a certain foreign country (r= r^w+ political instability)

27
Q

what is risk premium?

A

this extra cost that arises when investing in a foreign country that is politically unstable (r= r^w+ political instability)

28
Q

what are 4 things that political instability can rise from?

A

civil unrest
political corruption
war fare
political assassinations

29
Q

how will limiting foreign ownership impact the market for loanable funds (price, nco,domestic investment, foreign savigns)?

A

it will increase the price (world interest rate + capital controls)

it will decrease NCO but will still be positive

it will decrease domestic investment

it will increase foreign savings

30
Q

how will limiting foreign ownership impact the foreign exchange market (supply, indirect exchange, domestic currency value, net exports, net capital out flow)?

A

it will increase the supply for dollars

it will decrease the E (indirect exchange rate)

it will cause the domestic currency to depreciate

net exports will increase

net capital outflow will increase

31
Q

how does an increase of world exchange rates due to capital controls impact the foreign exchange and loanable funds markets (domestic investment, foreign investment, nco, supply, value of domestic currency, net exports)?

A

decrease in domestic investment
increase in foreign investment
increasing NCO
increase in supply for dollars (NCO increase)
depreciating domestic currency
increase in net exports (NCO=NX)

32
Q

what is government budget deficits and surpluses like in an open economy?

A

it is the same as in a closed economy since government deficit spending come out of national savings
(foreign savings+ domestic savings)

33
Q

in an open economy, what happens when the government budget is in a deficit?

A

the crowding out effect (reducing national savings)

34
Q

how does government budget deficit impact the market for loanable funds (supply, NCO, foreign savings, demand)?

A

decrease in supply in loanable funds
decrease in NCO less than 0
decrease in foreign savings
demand remains unchanged

35
Q

how does government budget deficit impact the foreign exchange market (supply, demand, indirect exchaneg rate, domestic currency value, NX)?

A

decrease in supply of domestic currency
increase in demand
increase in E (indirect exchange)
domestic currency is apprecciating (increasing)
net exports (NX) increases

36
Q

how does government spending impact the loanable funds and foreign exchange market (national savings, NCO, supply, indirect exchange rate, domestic currency value, net export)?

A

decrease in national savings
decrease in net capital outflow (S decrease- I)
decrease in supply of domestic currency
increase in E (indirect exchange rate) e decreases
domestic currency appreciating
net exports decrease

37
Q

what directly influences the quantity of goods and services that a country imports and exports?

A

government trade policy

38
Q

what is net exports directly tired to?

A

the demand for dollars

39
Q

how does an import quota effect the market for loanable funds?

A

it doesn’t

40
Q

how does an import quota impact the foreign exchange market (demand, indirect exchange, doemestic currency value, net exports)?

A

increases the demand for of domestic funds
increasing E (indirect exchange rate)
domestic currency appreciating
decrease net exports

macroeconomics (13 decks)

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