graphs

Question 1

what are the 4 graphs that will be covered in the final?

Answer 1

the market for loanable funds
the money market
aggregate supply and demand
foreign exchange market

Question 2

how are the graphs linked together?

Answer 2

foreign exchange and loanable funds market

aggregate demand and the money market

Question 3

what links the foreign exchange market and loanable funds market?

Answer 3

net capital outflow

Question 4

what links the aggregate demand and money market ?

Answer 4

money supply

Question 5

what are the 4 things that impact the foreign exchange market and the market for loanable funds?

Answer 5

change in world real interest rate
capital controls and political instability
government budget deficit or surplus
trade policy

Question 6

how would a change in world real interest rates impact the foreign exchange market and market for loanable funds?

Answer 6

loanable fund market:
increase in world interest rates increases NCO and changes supply and demand for loanable funds

foreign exchange market:
changes the supply of dollars (shift supply curve)
changes demand for dollars
changes exchange rate

Question 7

how would government budget deficit or surplus impact the foreign exchange market and market for loanable funds?

Answer 7

loanable funds market:
changes the supply of dollars (shift supply curve)
changes net capital outflow

foreign exchange market:
change supply of dollars (shift supply curve)
change demand for dollars
changes the exchange rate

Question 8

what are the 2 kinds of trade policy that can impact the loanable funds market and foreign exchange market?

Answer 8

tariff
import quota

Question 9

what is a tariff?

Answer 9

a tax on imports

Question 10

what is an import quota?

Answer 10

a limit on the quantity of imports

Question 11

how would an import quota impact the foreign exchange market and market for loanable funds?

Answer 11

market for loanable funds:
it will not impact the market for loanable funds

foreign exchange market:
increase the demand for dollars (shift demand curve right)
increasing the supply of dollars
increasing the exchange rate

Question 12

how would capital control impact the foreign exchange market and market for loanable funds?

Answer 12

loanable funds market:
increase supply for dollars (shift curve to the left)
increase world interest rate
increase in net capital outflow

foreign exchange market:
increase supply of dollars
increase demand for dollars
decrease exchange rate

Question 13

what can shift the long run aggregate supply curve?

Answer 13

economic growth ( change in factors of production or technology)

Question 14

what can shift the aggregate demand curve?

Answer 14

changes in the money supply

Question 15

what can shift the short term aggregate supply curve?

Answer 15

changes in expected price
change in production costs

Question 16

Explain the core principles of the two theories for exchange rate determination and explain
how these theories can coexist?

Answer 16

PPP focuses on the relationship between exchange rates and prices. For PPP to hold, LooP must be satisfied. PPP is concerned with long-run (LR) dynamics, since that over time,
arbitrage opportunities will eliminate price differences.

UIP focuses on the relationship between exchange rates and interest rate differentials. UIP is linked to short-run (SR) expectations as the cause fluctuating exchange rates.

Question 17

explain an aggregate demand induced recession?

Answer 17

as Firms anticipate higher future prices for their products but cannot immediately adjust their current prices due to the stickiness. they plan to produce more causing a shift in SRAS back to LR equilibrium point.

Question 18

explain an aggregate supply induced recession?

Answer 18

In the long run, AS shifts to the right as expectations settle, the decline in output eventually leads to a decline in the price.