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EC1101E > Macro 6 > Flashcards

Macro 6 Flashcards

1
Q

What is currency market?

A

market where one currency is traded for another

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2
Q

What are foreign exchange reserves?

A

foreign currency holdings of central banks

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3
Q

What is the exchange rate?

A

rate at which one currency is traded for another

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4
Q

What do foreign country resident have ot buy domestic currency for? (EG why japan resident buy USD using Yen)

A
  1. buy domestic goods(buy us goods, exports by US)
  2. buy domestic assets (capital inflow domestically)
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5
Q

What might cause the shift in demand curve for dollars from Japan involving US goods?

A
  • foreign country (Japan’s )real GDP rises
  • foreign residents (Japan ) increase their fondness for US goods
  • foreign country (Japan) price level rises, relative to US price level
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6
Q

What might cause the increase in demand curve for dollars from Japan involving US assets?

A

foreign country (japan) interest rate falls relative to US interest rate

foreign residents(japan) believe that the dollar will appreciate against the yen

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7
Q

What happens to domestic currency when foreign country experience RGDP growth?

A

domestic exports to foreign country increase

demand for domestic currency shift right

Domestic currency appreciates

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8
Q

What is hot money?

A

funds that can be moved from one type of asset to another at very short notice

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9
Q

What are the factors that affect hot money flows?

A

Changes in expectations and interest rates

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10
Q

What happens to price when traders expect domestic currency to depreciate?

A

For foreign investors, domestic assets less attractive , demand for domestic shift left

For domestic residents, foreign assets are more attractive, supply of domestic currency shift right

RESULT IN LARGE DECREASE IN PRICE OF DOMESTIC CURR TODAY

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11
Q

What is arbitrage?

A

buy an item in one market, sell it in another market for a higher price

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12
Q

Arbitrage removes ________________ in exchange rates

A

virtually all geographic differences

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13
Q

What happens when the exchange rate in New york is 95 yen and 105 yen per dollar in London?

A

demand for usd in new york shift right

sell yen for $ 100 in new york, and sell the 100 usd for higher yen of 10500 yen in London

Supply of USD in london shift right

usd depreciate in london until exchnage rate equal in 2 cities

usd apperciate in new york

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14
Q

What is used to predict what happens in the long run when there are different exchange rates?

A

purchasing power parity

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15
Q

What is PPP formula?

A

price level of good A in Yen in Japan/price level of good A in USD in US

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16
Q

How to tell how much something is undervalued?

A

(PPP- exchange rate )/ exchange rate *100

17
Q

Why does PPP theory not hold exactly?

A

Transportation costs are not zero

Many goods and services (e.g. haircuts) are non-tradable

Barriers to trade may be present

Other determinants of exchange rate matter

18
Q

How to calculate growth of ppp exchange rate (with japan in numerator for ppp)

A

japan inflation rate- us inflation rate

If gppp positive, usd appreciate against yen

19
Q

PPP Theory predicts that countries with ________ X% per year _____ than US will see their currencies ____________ against the US dollar

A

inflation rates
higher
depreciate by X% per year

20
Q

What does it mean by floating exchange rate?

A

allow demand and supply to operate freely in the currency market

21
Q

What happens when you use fixed exchange rate?

A

central bank participates in the currency market to ensure that the exchange rate stays within 0.05HKD of the peg

22
Q

What happens when you use managed exchange rates?

A

central bank also participates in currency markets

manage the value of the Singapore dollar against currencies of its major trading partners, but without explicit commitments

23
Q

Why should we use fixed / managed exchange rates?

A

Preventing or slowing down appreciation helps exporters and those competing against imports

Preventing or slowing down depreciation helps import-using industries and consumers

Keeping the exchange rate stable reduces the risk for doing international business transactions

Pegging one’s currency to USD ties one’s monetary policy to that of the Fed, gaining credibility to fight inflation

24
Q

How does central bank prevent appreciation, if there is excess demand for domestic currency?

A

maintain the peg, central bank must sell domestic reserve by shortage each month at the exchange rate at excess demand

buys the equiv amount of usd

central bank accumulates foreign exchange reserves

25
Q

What happens when traders expect depreciation in domestic currency?

A

Supply of the domestic currency shifts right

Demand for domestic currency shifts left

Excess supply widens

Even faster depletion of reserves!

26
Q

What options does a country if foreign exchange reserve runs out?

A

Allow the domestic currency to float

Devalue domestic currency: lower peg to sustainable level

Impose capital control

Borrow from IMF : lender of last resort, imf impose stringent condition

27
Q

How did panic spread to other asian countries?

A

Investors started to wonder if banks and companies in nearby countries were similarly vulnerable!

bank run developing into a banking panic

28
Q

What lessons could be learnt from the asian financial crises?

A

The need for ample foreign exchange reserves

The need to monitor private sector borrowing in foreign currency

29
Q

How do exchange rate movement provide source of demand shock?

A

currency depreciation lead ot net export increase

AE increase
Y* increase

30
Q

exchange rate channel makes _______impact on output _________ in an open economy than in a closed one

How does that occur?

A

monetary policy’s
more powerful

interest rate decrease causes domestic assets less attractive, foreign asset more attractive, currency depreciate, NX increase

31
Q

What is the trilemma?

A

free capital mobility, exchange rate movement, monetary authority

32
Q

What is the difference between bilateral and overall trade balance?

A
  • bilateral: measured against one otehr country
  • overall: measured against world
33
Q

What is the currency market eqm?

A

quantity of domestic curr supplied (domestic purchase of foreign gns and assets)

quantity of domestic curr demanded(foreign purchase of domestic gns and assets)

34
Q

What is the eqm condiiton if trade deficit?

A

Domestic trade deficit (domestic purchase foreign goods- foreign purchase of doemstic goods)

Domestic net financial inflow from foreign country (foreign purchase us asset- domestic purchase of foreign asset)

EC1101E (13 decks)

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