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Chapter 19 Flashcards

1
Q

Balance of payments accounts

A

A summary of the country’s transactions with other countries

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2
Q

Factor income

A

The income countries pay for the use of factors of prodution owned by residents of other countries

ex. interest paid on loans from overseas; profits of foreign-owned corporations; disneyland paris profits, wages of an American engineer who works temporarily on a construction site in Dubai are counted in the second column

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3
Q

International transfers

A

Funds sent by residents of one country to residents of another

ex. remittances that immigrants, such as mexican born workers employed in U.s., send to their families in their country of origin

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4
Q

Most of sales involved in Official asset sales and purchases involved _____________________

A

the accmumulation of foreign exchange reserves by the central bank of China and oil-exporting countries

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5
Q

Purchase of Ford Motor Company’s Volvo brand by the Chinese company Greely Automobile

A

Private sales and purchases of assets: payments from foreigners

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6
Q

Purchases of European stocks by U.S. investors

A

Private sales and purchases of assets: payments to foreigners

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7
Q

The balance of payments accounts distinguish between _______________________

A

transactions that don’t create liabilities and those that do

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8
Q

Balance of payments on current account; current account

A

Its balance of payments on goods and services plus net international transfer payments and factor income

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9
Q

Balance of payments on goods and services

A

The difference between its exports and its imports during a given period

*most important part of the current account

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10
Q

Merchandise trade balance

or

“trade balance”

A

The difference between a country’s exports and imports of goods

*doesn’t include services

**used because data on international trade in services aren’t as accurate as data on trade in physical goods, and they are also slower to arrive

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11
Q

The current account consists of international transactions that _____________

A

don’t create liabilities

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12
Q

Balance of payments on financial account

or

“financial account”

or

“capital account”

A

The difference between its sales of assets to foreigners and its purchases of assets from foreigners during a given period

*international transactions that do create future liabilities are included here

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13
Q

Financial account surplus:

A

the value of the assets it sold to foreigners was more than the value of the assets it bought from foreigners

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14
Q

current account deficit

A

the amount it paid to foreigners for goods, services, factors, and transfers was more than the amount it received

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15
Q

Current and financial account formula

A

Current account (CA) + Financial Account (FA) = 0

CA = -FA

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16
Q

Gross national product

A

includes international factor income

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17
Q

Why do economists use GDP rather than a broader measure?

A
  1. original purpose of national acounts was to track production rather than income
  2. Data on international factor income and transfer payments are generally considered somewhat unreliable
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18
Q

Circular flow diagram equation

A

Positive entries on current account - Negative entries on current account + Positive entries on financial account - Negative entries on financial account = 0

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19
Q

Financial account measures what?

A

measures a country’s net sales of assets to foreigners

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20
Q

A country’s financial account is a measure of _______________

A

capital inflows

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21
Q

Capital inflows

A

Foreign savings that are available to finance domestic investment spending

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22
Q

Direct foreign investment

A

When companies build factories or acquire other productive assets abroad

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23
Q

exchange rates

A

The relative values of different national currencies

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24
Q

Capital tends to flow from ________________________

A

slowly growing to rapidly growing economies

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25
Government budget deficits \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
reduce overall national savings, can lead to capital inflows
26
net capital flows
The excess of inflows into a country over outflows, or vice versa
27
Why aren't out capital flows the same as previous ones?
Migration restrictions Political risks
28
A country that receives net capital inflows must run a \_\_\_\_\_\_\_\_\_\_\_\_\_\_
matching current account deficit
29
A country that generates net capital outflows must run a \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
matching current account surplus
30
Foreign exchange market
Where currencies are traded
31
Exchange rates
The prices at which currencies trade
32
Appreciates
When a currency becomes more valuable in terms of other currencies
33
Depreciates
When a currency becomes less valable in terms of other currencies
34
Value of 1 euro goes from $1 to $1.25
Means that the value of US$1 went from 1 euro to 0.80 euro (1/1.25) Euro appreciated and U.S. dollar depreciated
35
If exchange rate is 1.25 euros = $1
French hotel room is 20% cheaper 1.25/1
36
If exchange rate is 0.80 euros = US$1
French hotel room is 25% more expensive than American hotel room 1/.80
37
When a country's currency appreciates (becomes more valuable) \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
exports fall and imports rise
38
When a country's currency depreciates (becomes less valuable) \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
exports rise and imports fall
39
The quantity of U.S. dollars demanded falls as the number of \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
euros needed to buy a U.S. dollar rises
40
The quantity of U.S. dollars demanded rises as the number of \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
euros needed bo buy a U.S. dollar falls
41
Why supply curve is upward The more euros required to buy a U.S. dollar, the more \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
dollars Americans will supply
42
Equilibrium exchange rate
The exchange rate at which the quantity of a currency demanded in the foreign exchange market is equal to the quantity supplied
43
If the demand for U.S. dollars increases (shifts to right)
Equiplibrium number of euro per U.S. dollar rises - dollar apreciates against the euro Balance of payments on current account falls Balance of payments on financial account rises
44
Any change in the U.S. balance of payments on financial account generates \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
an equal and opposite reaction in the balance of payments on current account
45
Real exchange rates
Exchange rates adjusted for international differences in aggregate price levels
46
The exchange rate unadjusted for aggregate price levels are sometimes called\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
nominal exchange rate
47
Real exchange rate =
Mexican pesos per U.S. dollar x (Price level us / price level mexico)
48
The current account responds only to changes in \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
the real exchange rate, not the nominal exchange rate
49
A country's products become cheaper to foreigners only when that country's currency \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
depreciations in real terms
50
A country's products become more expensive to foreigners only when the currency \_\_\_\_\_\_\_\_\_\_\_\_\_\_
appreciates in real terms
51
Purchasing power parity
The purchasing power parity between two countries' currencies is the nominal exchange rate at which a given basket of goods and services would cost the same amount in each country
52
When the nominal exchange rate is ____________ thepurchasing power parity, the basket is cheaper in that country
above
53
What does the nominal exchange rate determine?
The price of imports and exports
54
Movements in the exchange rate can have major effects in countries were exports and imports are large percentages of GDP by\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
affecting aggregate output and aggregate price level
55
Exchange rate regime
A rule governing policy toward the exchange rate
56
Fixed exchange rate
When the government keeps the exchange rate against some other currency at or near a particular target
57
Floating exchange rate
When the government lets market forces determine the exchange rate
58
Exchange market intervention
Government purchases or sales of currency in the foreign exchange market
59
Foreign exchange reserves
Stocks of foreign currency that governments maintain to buy their own currency on the foreign exchange market
60
For governments to keep the value of their currency down through market intervention they must \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
buy foreign assets
61
Foreign exchange controls
Liscensing systems that limit the right of individuals to buy foreign currency
62
3 ways to support a currency
1. "soak up" the surplus of genos by buying its own currency in the foreign exchange market 2. shift supply and demand by changing monetary policy (increasing interest rates) 3. Reducing the supply of currency to the foreign exchange market - foreign exchange controls --\>increases the value of a country's currency
63
To keep the geno from rising above $1.50, the Genovian government can \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
sell genos and buy U.S. dollars.
64
How to keep exchange rate below equilibrium?
1. Selling domestic currency and acquiring US dollars, which it can add to its foreign exchange reserves 2. Reduce interest rates to increase the supply of genos and reduce the demand 3. Impose foreign exchange controls that limit the ability of foreigners to buy genos \*all reduce the value of the geno and keep it below equilibrium
65
Additional benefit to adopting a fixed exchange rate: by committing itself to a fixed rate, a country is also committing itself not to \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
engage in inflationary policies
66
Costs to fixing the exchange rates
1. a country must keep large quantities of foreign currency on hand - low return investment 2. if they use monetary policy, they must divert from other goals such as stabilizing the economy 3. foreign exchange controls distort incentives for importing and exporting goods and services 4. create substantial costs in terms of red tape and corruption
67
A country that lets its currency float \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
leaves monetary policy available for macroeconomic stabilization but creates uncertainty for business
68
Fixing the exchange rate \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
eliminates the uncertainty but means giving up monetary policies and/or adoipting exchange controls
69
currency crises
Episodes in which widespread expectations of imminent devaluations led to large but temporary capital flows
70
What countries did not adopt the euro?
Britain Sweden
71
Devaluation
A reduction in the value of a currency that is set under a fixed eschange rate regime \*A devaluation is a depreciation that is due to a revisioin in a fixed exchange rate
72
depreciation
a downward move in currency
73
Revaluation
An increase in the value of a currency that is set under a fixed exchange rate regime
74
Devaluation causes:
Makes domestic goods cheaper =\> higher exports Makes foreign gods more expensive =\> reduces imports \*increases the balance of payments on current account
75
Revaluation causes:
Makes domestic goods more expensive =\> reduces exports Makes foreign goods cheaper =\> increases imports \*reduces the balance of payments on current account
76
Devaluation increases \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
aggregate demand can be used to reduce a recessionary gap
77
Revaluation reduces \_\_\_\_\_\_\_\_\_\_\_\_\_\_
aggregate demand \*can be used to reduce or eliminate an inflationary gap
78
Devaluations and revaluations serve two purposes under fixed exchange rates:
1. Can be used to eliminate shortages or surpluses in the foreign exchange rate 2. Can be used as tools of macroeconomic policy
79
A reduction in the interest rate's effect on the foreign exchange market graph
Shift supply to the right =\> genovians invest more abroad, buying more U.S. dollars and selling more genos Shift demand to the left =\> foreigners invest less in Genovia, reducing their demand for genos
80
A recession leads to a ________________________ and an expansion leads to a \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
fall in imports; rise in imports
81
One of the virtues of a floating exchange rate
Is that they help insulate countries from recessions originating abroad
82

zMacroeconomics (26 decks)

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