Ch.10&11 X Rates & Balance of Pmts

Question 1

A theory that
X Rate changes to equate
Purchasing Power
of each currency

Answer 1

Purchasing Power Parity Theory

purchasing powers of diff. currencies will tend to become equal over time

Question 2

5 Reasons why
Prices are not the same worldwide?
(Prevent from
Purchase Power Parity)

Answer 2

1) Srv NOT traded int’lly
(G/S NOT transportable)
2) Trans & Insurance costs
3) Tariffs & Trade restrictions
4) Consumer Preferences
5) Financial Assets value of currencies of trade

Question 3

Buying
@where for $
& Selling it
@where for $$$
is called ___

Answer 3

Arbitrage

Question 4

Investment type that is
the Purchase of
Real Assets/Real Estate

Answer 4

Direct Investment

Question 5

Investment type that is
the Purchase of
shares/bonds < 50% ownership

Answer 5

Portfolio Investment

Question 6

5 DD for domestic currency
(supp for foreign currency)

Answer 6

1) Foreigners who buy exports or travel
2) Foreigners who invest
3) Receive income/gift/transfer from abroad
4) Speculator
5) Arbitrager

money in

Question 7

5 Supp for domestic currency
(DD for foreign currency)

Answer 7

1) Buy Foreign Imports or Travel
2) Buy foreign investment
3) Foreigners who receive income/gift/transfer
4) Speculator
5) Arbitrager

money out

Question 8

DD crv of a currency =?
Supp crv of a currency =?

Answer 8

Export = DD Crv
Import = Supp Crv

Question 9

When currency depreciates,
the effective price of
EXPORTS __
& total exports __

Answer 9

↓
↑

Question 10

When currency appreciates,
the effective price of
IMPORTS __
& total imports __

Answer 10

↓
↑

Question 11

In Currency DD/Supp graph
X-Axis=?
Y-Axis=?

Answer 11

X = Qty of a currency
in World Money Market

Y = Price of a currency
in Foreign X value

Question 12

When buying imported goods,
Supply of Domestic Currency __

Answer 12

↑

Question 13

DD of currency
comes from ___

Supp of currency
comes from ___

Answer 13

Foreigners

Citizens

Question 14

4 Determinants of
DD of a currency

Answer 14

1) Income Level of foreigners
2) Relative Prices of products
sold in domestic/foreign
excl oil
3) Foreigners’ Tastes
4) Comparative Interest Rates
$$ → higher interest rate

Question 15

When Exports ↓
Currency Value __
Aggr. DD Level __
GDP Level __
Price Level __

Answer 15

↓
↓
↓
↓

Question 16

___ X Rates can
- ↓ Currency Speculation
- ↓ Int’l Certainty & Stability
- equate National Prestige

Answer 16

Fixed X Rates

Question 17

When using Fixed X Rates
DD of currency ↑
⇒ Currency value ___(shortage/surplus)
so it’s ___-valued (over/under)

Answer 17

Shortage
Under-valued

⇒ Export↑
⇒ Money supply↑
⇒ Inflation
⇒ Price level↑ ⇒ Export↓

Question 18

When using Fixed X Rates
DD of currency ↓
⇒ Currency value ___
(shortage/surplus)
so it’s ___-valued (over/under)

Answer 18

Surplus
Over-valued

⇒ Export↓
⇒ Foreign Reserves↓
⇒ Recession
⇒ Price level↓ ⇒ Export↑

Question 19

Gov’s 5 strategies
when using Fixed X Rates
& DD of currency↓

Answer 19

1) Tariff/Quota ⇒ Import↓
2) Foreign X Ctrl
3) Voluntary Trade Restrictions
4) Creating Recession
5) Devalue Fixed X Rate

Question 20

Central Bank allows
currency value to
Float/Fluctuate in a degree
in order to Stabilize X Rate

Answer 20

Managed X Rate or
Dirty Float

Question 21

An accounting of a country’s
int’l transactions of
Payments & Receipts
of foreign currencies

Answer 21

Balance of Payments

Question 22

3 Subcategories of
Balance of Payments

Answer 22

1) Current Acct
Exports & Imports
Income/Expenditure
2) Capital Acct
∆ in Ownership of Assets
direct/portfolio inv.
3) Official Settlement Acct
∆ in Foreign X Reserves
= central bank gain/loss foreign currency

Question 23

Exports of G/S
- ) Imports =?

Answer 23

Net Exports or
Balance of Trade

Question 24

Income (Wage/Interest/Div)
that Nationals received for
srv to another country

Answer 24

Foreign Factor Income

Question 25

Status that Bank of Canada provides Foreign Reserves ⇒ **Outflow** of Foreign Reserves *when CAD$ is **less demanded** by foreign*

Answer 25

**Balance of Pmts Deficit**

Question 26

Status that Bank of Canada gains Foreign Reserves in exchange for CAD$ ⇒ **Inflow** of Foreign Reserves *when CAD$ is **more demanded** by foreign*

Answer 26

**Balance of Pmts Surplus**

Question 27

____ measures the comparative purchasing power of a currency & formula

Answer 27

Real Exchange Rate . $ in A RXR = ----------x Nom.X Rate . $ in B

Question 28

Why currencies Appreciate/Depreciate?

Answer 28

Demand / Supply of Currencies

Question 29

A Theory that a country producing more G/S w/ ***specialized advantage*** *a.k.a. factor endowment*

Answer 29

Theory of **Absolute Advantage** *- Adam Smith*

Question 30

A Theory that countries prod w/ **Lower Opportunity Costs** & Trade for **Mutual Gains**

Answer 30

Theory of **Comparative Adv** *- David Ricardo*

Question 31

4 Areas lead to different specialization in prod for a conntry

Answer 31

① **Climate** ② Natural **Resources** ③ **Human Capital** ④ Gov **Policy**

Question 32

6 Arquments against **Free Trade**

Answer 32

① Strategic Industry ② Infant Industry ③ Cultural Identity ④ ↓ Standards of Environmental & Labour *race to the bottom* ⑤ negative Multiplier effect ⑥ Unctrl Capital & Labour Movement

Question 33

When **Removing Tariff** Currency Value ↑/↓ ? Total Value of Trade ↑/↓ ? & why?

Answer 33

Removing Tariff ⇒ $↓ ⇒ DD for Import ↑ ⇒ Supp of Domestic $$ ↑ ⇒ **Domestic $$ Value ↓** ⇒ Export ↑ ⇒ **Total Value of Trade ↑** *(import & export ↑)*