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ECON 476 > Final Study > Flashcards

Final Study Flashcards

(101 cards)

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1
Q

Describe BOP entries for:

a) Alta farmer sells to Japan
b) Nova Scotian opens bank account in Maine
c) A Sask firm imports French perfume

A

a) recorded as credit as it’s an export
b) debit (importing services of the bank)
c) debit it’s an import

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2
Q

Residents of Canada send $5000 to Bosnians as gift. How recorded?

A

Dr. Unilateral transfers -5000

Cr. Export goods +5000

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3
Q

When do the current account and financial account balances sum to zero?

A

When the official settlements balance is zero

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4
Q

Has FDI become more or less important to the US?

A

More important to the US but still less important relative to other countries

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5
Q

Has FDI become more or less important to the US?

A

More important to the US but still less important relative to other countries

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6
Q

Does Canadian demand for BMWs affect supply of euros?

A

No. It affects demand for euros and shows willingness to supply dollars

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7
Q

How does German demand for Canadian wheat affect market for Canadian dollars?

A

Reflected in demand for dollar. Germans trade euros for Canadian dollars

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8
Q

When euro demand rises does it take more or less yen to buy a euro? Yen/Euro X rise or fall?

A

More yen to buy euro. X rate rises

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9
Q

Advantages of futures contract over a forward contract?

A

Futures contract can be closed out with a transaction. Forward has an obligation to trade at exchange rate.

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10
Q

What is the peso problem? And how can it be used to explain expectation errors?

A

Mexican gov fixed peso to USD but market traded peso at forward discount. Change was expected but delayed

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11
Q

What happens to the BOP if there is an excess demand for money? Foreign reserves at central bank rise or fall?

A

Spending reduced > Income and prices fall > encourages exports > BOP surplus > Buy foreign reserves > Money supply rises

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12
Q

If inflation was expected to rise would the money demand rise or fall?

A

Higher expected inflation > higher interest rates > lower demand for money and they switch into interest bearing assets.

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13
Q

Increase in home country income affect exchange rate under asset approach?

A

Increased money demand > selling bonds > Fixed: BOP surplus, Flexible: domestic currency gain

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14
Q

Increase in expected inflation affect the exchange rate under the asset approach?

A

Higher expected inflation suggests currency expected to lose value

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15
Q

If you wanted to estimate a J curve for Canada what exchange rate would you use?

A

Effective exchange rate with trade weighted average compared to major trading partner currencies

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16
Q

Why short run supply curve less elastic than the long-run supply curve?

A

Decision-making lags.

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17
Q

Under fixed exchange rates: if demand for a currency falls will the foreign currency reserves at the central bank also fall?

A

Central bank needs to sell foreign currency to reduce supply which reduces currency reserves

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18
Q

What happens to domestic money supply when the demand for the domestic currency rises?

A

Money supply must also rise to be consistent with the new demand and exchange rate stays fixed.

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19
Q

What is the equilibrium income equation?

A

Y = C + I + G + (X-M)

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20
Q

What are two deficiencies of the simple absorption approach?

A

1) Depends on both monetary and fiscal policies.

2) Does not incorporate the capital account

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21
Q

Why are monetary and fiscal policies inversely related with respect to attaining internal and external balance?

A

Both affect BOP in similar ways. Expansionary fiscal policy would have to be met with contractionary monetary policy and vice versa

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22
Q

Why will one policy instrument not achieve both targets when the economy is in region II of the Mundell-Fleming?

A

It will push towards monetary or fiscal policy goals but not both. Both converge in the middle of the Mundell-Fleming model.

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23
Q

Describe the regions of the Mundell Fleming

A 
Clock-wise from top left
I) High unemployment, BOP surplus
II) Rapid inflation, BOP Surplus
III) Rapid inflation, BOP deficit
IV) High unemployment, BOP deficit
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24
Q

Why does the IS curve have a negative slope?

A

Interest rate falls investment increases

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25
Why does the LM curve have an upward slope?
As income rises the demand for money increases and the interest rate rises ceteris paribus
26
What happens to the demand for money when interest rates rise?
It decreases
27
How does a fall in foreign interest rates affect the BP curve?
Shifts BP curve right as a lower interest rate is needed to reach equilibrium domestically
28
How will a rise in foreign income affect the BP curve?
Shifts BP curve right. Increase in domestic exports > higher domestic income for equilibrium
29
Will a shift in foreign interest rates shift the LM curve?
****Shouldn't because it doesn't affect money supply
30
How do fiscal policies depend on the degree of capital mobility and crowding out?
If capital is perfectly immobile government spending will only crowd out investment so it's ineffective
31
Demo that monetary policy cannot change real output under fixed exchange rates with the IS/LM/BP model
The central bank will always adjust the foreign reserves to maintain the exchange rate which will not allow for increases in output
32
How do the relative slopes of the BP and LM curves affect the impact of an increase in gov spending on output
Increase in gov spending = IS curve shifts right If BP is less steep than LM then output will increase as LM shifts right
33
Explain the importance of the assumption that the Marshall-Lerner conditions are satisfied
Depreciation of the domestic currency will lead to a rightward shift in the IS curve. Net exports will rise
34
Why does revaluation lead to greater output loss when capital is perfectly mobile in fixed exchange?
``` BP flat (perfectly mobile). IS shifts to the left > pressure on interest rates causes ST capital outflow > CB sells foreign currency to maintain exchange rate > money supply reduced. ```
35
Reduction in foreign income shift the BP curve?
Less domestic exports > less income to maintain BOP EQ > Shifts left
36
Rise in foreign interest rates shift the BP curve?
Increase in financial outflows from home > needs higher interest rate to balance payments > shifts left.
37
Reduction in domestic income do to the BP curve?
Less foreign imports > higher income needed to maintain BOP EQ > shifts right
38
Reduction in government spending affect equilibrium output with perfectly mobile capital? Flex exchange rates
IS shifts to the left > interest rates are too low so capital outflow > currency devalues > increase in net exports > IS back to original
39
With perfectly mobile capital what happens to the domestic interest rate when government spending rises?
No change as there is enough short-term capital to finance the government spending
40
How does a reduction in the money supply affect the economy under perfect capital mobility and flexible exchange rates?
Lower money supply > excess money demand > income falls to restore equilibrium > domestic currency appreciates > income reduced > IS curve shifts left b/c of lower net exports > Net result: lower income and appreciated currency
41
With imperfectly mobile capital does an increase in the money supply lead to a depreciation?
Yes. Ms expansion > decrease in domestic interest rate > SR capital outflow > lowering home currency value
42
Reduction in foreign prices affect domestic economy under flex exchange and imperfect capital mobility?
Left shift in IS as net imports rise (net exports fall) > BP curve shifts to the left > currency depreciates > increase in net exports > IS/BP back to originals > Net result: income and interest rates don't change but domestic currency has lost value.
43
How do you derive economy-wide AD curve?
Find the different income levels from the IS-LM model for different price levels. Take those points and plot on AD curve (x=income, y=price)
44
If AD curve shifts to the right describe the short-run and long-run effects on output and prices. What happens to nominal wage?
SR: output increases, prices increase, later wages increase and shift AS curve LR: Output only temporary
45
What happens under fixed exchange rate when the price level falls?
LM, IS and BP curves shift to the right b/c LM: lower prices create excess money supply and need lower interest rates and higher level of income for EQ, IS: domestic goods are cheap so net exports will rise BP: Current account surplus matched by capital outflows b/c of lower interest rates.
46
How will a change in favour of domestic goods shift the AD curve?
Flex: exchange rate adjusts to shelter AD from the shock Fixed: AD curve shifts left
47
Why does the AD curve shift right when domestic bond holders move away from foreign bonds in favour of domestic bonds?
Flex: AD curve shifts left. Fixed: it shifts right.
48
Why does expansionary policies raise income in the short-run?
Reduce real wage > firms hire more workers > wages rise > LR EQ
49
What happens to the natural rate of unemployment when expansionary fiscal policies aimed at expanding infrastructure occur?
It falls because the capital stock will rise > more output at each level of employment > labour demand increases > higher employment
50
What happens to the domestic currency when monetary policy is used to raise output from unemployment level?
It shifts the LM curve to the right which forces AD to the right and domestic currency loses value.
51
What happens to the domestic economy if its currency is expected to lose value?
Increase demand for foreign currency. Under flex exchange rates: domestic currency will lose value > net exports up > AD curve will shift right. Could be stagflation
52
What happens to the domestic economy if the foreign interest rate rises?
Capital outflow?
53
6 reasons in favour of fixed exchange rates?
1) Elimination of inflation 2) Coordinate b/n countries 3) Less loss on bad resources 4) Reduce trade uncertainty 5) Less exchange rate risk for investment 6) Fiscal policy works better
54
5 reasons against fixed exchange rates?
1) Require CB intervention 2) Operation b/n countries difficult 3) Heighten business cycles 4) Introduce rigid prices 5) External balance > internal balance
55
4 arguments in favour of flexible exchange rates?
1) Reduces need for CB foreign reserves 2) No artificial wedge in relative prices 3) Monetary policy works well 4) Shelters from shocks elsewhere
56
3 reasons why a country wouldn't adopt a flexible exchange rate system?
1) Wasteful movements in resources 2) Destabilizing speculation 3) Large changes in the exchange rate needed to get trade flows to respond
57
What is an optimum currency area?
Fixed exchange rates with nearby countries but not outside that area.
58
2 reasons for and 2 against a crawling peg?
For: 1) Provides discipline for monetary authorities 2) Less large speculation Against: 1) Can't respond to large BOP shocks 2) With unstable internal conditions may be the same as a flexible system
59
What is a tranche in relation to the IMF?
A portion of the country's quota for borrowing from the IMF (out of 125% in 25% increments)
60
4 Essential features of the Jamaica Accord?
1) Each country free to choose preferred exchange rate 2) Role of gold was donwgraded 3) Role of SDR enhanced 4) IMF surveilles exchange rate behaviour
61
Essential features of the Louvre Accord?
USD to be stabilized in a range
62
Essential features of the Plaza Agreement?
To lower the USD value
63
What is the Maastricht Treaty
Establish the Euro and the ECB
64
What was the Smithsonian Agreement?
New set of par values after gold-standard break
65
Role of the IMF
Facilitate global economic stability
66
What does IS/LM/BP stand for and what are the axes?
``` IS: Investment/savings curve LM: Liquidity preference/Money supply BP: Balance of payments X-axis: GDP Y-axis: interest rate ```
67
Does an inflow of foreign currency appear as a debit or a credit in BOP?
Credit (+) as it's a receipt
68
Foreigner buys share of stock in domestic firm, debit or credit?
Financial account debit, financial account credit.
69
Media report for whether trade balance is favourable or unfavourable?
Exports are greater than imports
70
Difference b/n balance of trade and current account bal.?
Current account is the trade balance + net amount received for domestic factors used abroad
71
Is current account deficit considered beneficial or harmful?
Neither really. Some say harmful because country is not buying their own goods.
72
Difference between current account and the capital account?
Current account: net income | Capital account: Change in assets and liabilities
73
What is meant by net international investment position?
Essentially the country's balance sheet with the rest of the world.
74
What is the difference between the nominal exchange rate and the nominal effective exchange rate?
NER: The exchange rate between two countries NEER: Weighted average exchange rate with a basket of other countries
75
Nominal effective exchange rate vs real effective exchange rate
NEER: Weighted average exchange rate with a basket of other countries REER: Weighted average exchange rate with a basket of other countries using a real rate (using price indexes)
76
How does an option differ from a futures contract?
Holder not obligated to exercise an option
77
How would an increase in the money supply affect interest rates if output is fixed?
Lowers the interest rate
78
Income in A is rising, income in B is falling. Value of currency in A?
``` e = kYMs/kYMs [B/A] e=A/B exchange rate k=constant Y=income Ms=$ supply ``` A currency is decreasing
79
Canadian money supply is rising, Japanese is falling. Value of the yen?
e = kYMs/kYMs [B/A] Yen value increasing
80
If level of income in country A rises by the same proportion as the money supply in country A what happens to exchange rate?
Decreases
81
Are the empirical studies supportive of the portfolio balance approach?
Mixed. Frenkel: worked in hyperinflation | Dornbusch: Didn't work in low inflation
82
How does elasticity of demand for foreign goods affect supply of foreign exchange?
???Demand for foreign goods would increase demand for foreign currency so foreign exchange supply should decrease???
83
Marshall-Lerner demo
X/M | Ndx | + | Ndm | > 1
84
If CAD loses value and imports cost more will the stores pass on the higher prices immediately?
Business may take a margin hit before raising prices.
85
What are the rules of the game under the gold standard?
1) Gold moves freely b/n countries 2) Ms allowed to change 3) Prices & wages flexible
86
Internal vs external balance?
Internal relates to employment and price level stability. External balance relates to the current account.
87
What is the formula for the current account?
Current account = (X-M) + NIncome + NTransfers
88
How is an outflow from BOP accounts recorded?
Minus / BOP Debit
89
What is the balance on the financial account?
Change in external liab minus change in external assets
90
What conditions exist if there are no trade costs?
Law of one price and real exchange rate equals 1
91
If UK higher interest than Japan, with theory of covered interest arbitrage premium or discount?
UK: discount Japan: premium
92
According to the monetary approach a 10% increase in money supply causes the CAD exchange rate to?
Depreciate by 10%
93
What is the money multiplier equation?
``` Ms = a(BR+C) Ms = Money Supply a = multiplier BR = Bank reserves C= Currency held by the public ```
94
What is an incipient BOP deficit?
A BOP deficit in the presence of exchange rate adjustments
95
What is the J curve?
A curve that shows the effect of currency depreciation upon a country's current account balance over time.
96
Who first described exchange rate overshooting?
Dornbusch
97
BOP Credit
``` Credit: Receipts Exports Income Receivable Transfers from Increase in external lib Dec in external assets ```
98
What shifts the IS/LM curves
IS: Changes in: Y = C + I + G + NX LM: Changes in: Ms/P
99
Monetary vs Portfolio approach to exchange rates
Monetary: determined by relative money demand and supply Portfolio: Relative bond supply and demand and money market
100
What is mint-par?
Exchange rate with individual rates expressed in gold
101
BOP Debits
``` Debit: Payments Imports Income Payable Transfers to Decrease in external lib Inc in external assets ```

ECON 476 (1 decks)

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