Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

ECON 211 > CHAPTER 4 > Flashcards

CHAPTER 4 Flashcards

(72 cards)

Start Studying
1
Q

What does the balance of payments (BoP) represent?

A

An accounting record of a country’s involvement in international trade and capital flows.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What are the two main components of the balance of payments?

A
  • Current account
  • Financial account
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What does the exchange rate denote?

A

The international exchange value of the domestic currency against another currency.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are the components of the current account?

A
  • Exports
  • Imports
  • Net income payments
  • Net current transfers
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What determines the level of imports (M)?

A
  • Domestic income (Y)
  • South African prices relative to foreign prices
  • The exchange rate
  • Trade policy
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

True or False: An increase in domestic income leads to an increase in imports.

A

True

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What are the determinants of exports (X)?

A
  • Foreign income (Yf)
  • South African prices relative to foreign prices
  • The exchange rate
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

How is the current account balance calculated?

A

Current account = (X - M)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is a current account surplus?

A

Net inflow of funds in the current account.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is a current account deficit?

A

Net outflow of funds in the current account.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What happens to the current account if the rand depreciates?

A

The current account will first deteriorate before it improves.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are the two types of capital flows?

A
  • Direct investment
  • Portfolio investment
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is direct investment?

A

Setting up new companies or buying shares in companies with the objective to gain a meaningful say in management.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What factors influence capital flows?

A
  • Relative interest rates on financial investments
  • Relative rates of return on real investment
  • Exchange rate
  • Economic and political expectations
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is the effect of a BoP surplus on foreign reserves?

A

Increases foreign reserves.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is the impact of a BoP deficit on the money supply?

A

Decreases the money supply.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What is the nominal exchange rate?

A

Price of one currency in terms of another.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Define depreciation in the context of currency.

A

Value of the rand weakens.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is the chain reaction when the rand depreciates?

A
  • Price of imports (M) increases
  • Price of exports (X) increases
  • Imports are discouraged and exports are encouraged
  • Current account balance (X - M) increases
  • Expenditure and production increases
  • GDP and Y increase
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What is the role of net factor payments (NFP) in the current account?

A

Income payments that consist of wages and capital, representing ‘invisible trade’.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What does the current account J-curve illustrate?

A

The initial deterioration and eventual improvement of the current account after a depreciation of the currency.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Fill in the blank: If the BoP is positive, it indicates a net _______ of funds.

A

inflow

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Fill in the blank: If the BoP is negative, it indicates a net _______ of funds.

A

outflow

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What is the nominal exchange rate?

A

Price of one currency in terms of another

Example: $1 = R14.72 (R1 = $0.068)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
What does depreciation of a currency mean?
Value of the rand weakens ## Footnote Example: $1 = R14.72 to $1 = R15.00
26
What does appreciation of a currency mean?
Value of the rand strengthens ## Footnote Example: $1 = R14.72 to $1 = R14.50
27
What is the real exchange rate?
An adjusted exchange rate that takes differences between countries’ price levels into account
28
What is the effective exchange rate?
Expresses the value of the Rand relative to a ‘basket’ of important foreign currencies
29
What is a spot exchange rate?
The conventional exchange rate calculated for immediate transactions
30
What is a forward exchange rate?
The rate related to foreign exchange transactions to occur on some date in the future
31
How are exchange rates determined?
In the market for currencies, based on demand and supply
32
What is Purchasing Power Parity (PPP)?
Exchange rates account for differences in prices between countries
33
What is the Big Mac Index?
An index based on the theory of purchasing power parity, using the price of a Big Mac as a benchmark
34
What does a BoP surplus indicate?
Net inflow of funds, leading to an increase in demand for rands
35
What does a BoP deficit indicate?
Net outflow of funds, leading to an increase in supply of rands
36
What are floating exchange rates?
Exchange rates determined by the interaction of demand and supply in a free foreign exchange system
37
What are fixed (pegged) exchange rates?
Exchange rates set at a particular level by reserve bank intervention
38
What are dirty exchange rates?
A combination of floating and fixed exchange rates where the reserve bank moderates volatility
39
What causes exchange rates to appreciate?
Increase in demand for local currency due to exports or investment attractiveness
40
What causes exchange rates to depreciate?
Increase in supply of local currency due to imports or investment outflows
41
What is the BoP adjustment process?
Forces that eliminate disequilibrium in the balance of payments
42
What happens when BoP is in a deficit?
Outflow of foreign exchange leads to decreased money supply and increased interest rates
43
What is the IS-LM-BP model?
A model that includes the foreign sector to analyze economic relationships
44
What does the BP curve represent?
Shows combinations of Y and r consistent with BoP equilibrium
45
What does a shift in the BP curve indicate?
Changes in current account or financial account conditions
46
Fill in the blank: The Big Mac costs R33.50 in South Africa and US$5.66 in the United States. The implied exchange rate is _______.
5.92
47
True or False: A higher level of income requires a lower interest rate to maintain BoP equilibrium.
False
48
What is the impact of an increase in money supply on the LM curve?
Shifts the LM curve to the right
49
What is the relationship between BoP position and the BP curve?
A better BoP position shifts the BP curve to the right
50
What is the initial equilibrium condition in the context of the IS-LM-BP model?
IS = LM = BP
51
What happens in Phase 1 during an external disturbance?
X increase (IS right) → Y increase
52
What is the net effect of an increase in Y in Phase 1?
Y increase leads to M increase and CA deficit
53
What is the result of a BoP surplus in Phase 2?
LM shifts right due to money supply increase
54
How does an increase in Y affect the capital account?
CA deficit develops
55
What happens to the exchange rate during a BoP surplus?
Rand appreciates → X decrease & M increase
56
What is the effect of a BoP deficit on the LM curve?
LM shifts left due to a decrease in money supply
57
What is the net effect of a BoP deficit?
Y decreases & r decreases
58
What occurs when Y decreases due to a BoP deficit?
M decreases → CA surplus develops
59
What is the primary effect of expansionary monetary policy?
Repo decrease → MS increase → LM shifts right
60
What is the secondary effect of an increase in Y due to expansionary monetary policy?
MD increases → r increases → I decreases
61
Fill in the blank: If Y increases, CA ______ develops.
deficit
62
What is the net effect of primary and secondary monetary market effects in expansionary monetary policy?
Y increase, r decrease, CA deficit, FA deficit, BoP deficit
63
What is the primary effect of contractionary fiscal policy?
G decreases → Y decreases (IS shifts left)
64
What happens to the BoP when Y decreases due to contractionary fiscal policy?
CA surplus develops
65
How does the monetary market react to a decrease in Y?
r decreases → I increases → Y increases
66
What is the net effect of contractionary fiscal policy's primary and secondary effects?
Y decrease, r decrease, CA surplus, FA deficit, BoP deficit
67
What is the effect of negative external disturbances on Y?
Y decreases due to decreased X
68
What is the effect of negative external disturbances on the current account?
CA deficit develops
69
What happens to the LM curve during negative external disturbances?
LM shifts left due to decreased money supply
70
Fill in the blank: During a BoP deficit, rand ______.
depreciates
71
What is the concluding effect of a BoP adjustment via exchange rates during a deficit?
X increase & M decrease → CA deficit reduced
72
What is the process that continues until BoP equals zero?
Adjustment effects through monetary supply and exchange rates

ECON 211 (2 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions