Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Macroeconomics > Chapter 9 > Flashcards

Chapter 9 Flashcards

1
Q

What is the Foreign Exchange Market?

A

The market in which the currency of one country is exchanged for the currency of another

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

What is a foreign exchange rate?

A

The price at which one currency exchanges for another

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

What is currency depreciation?

A

A fall in the value of one currency in terms of another currency

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

What is currency appreciation?

A

A rise in value of one currency in terms of another currency

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

How is the exchange rate determined?

A

By the foreign exchange market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

How does the expected future exchange rate effect the Supply of CAD?

A

Expected future exchange rate ↑ - Supply of CAD ↓

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

What is the demand for one currency?

A

The supply of another currency

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is the Interest Rate Differential?

A

Interest rate Canada - Interest rate rest of world

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

What does the demand for Canadian currency depend on?

A
  1. The exchange rate
  2. World demand for Canada’s exports
  3. Interest rate in Canada compared to rest of the world (interest rate differential)
  4. The expected future exchange rate
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is the law of demand for foreign exchange?

A

The higher the exchange rate, the smaller is the quantity of Canadian dollars demanded in the foreign exchange market

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

How does the exchange rate influence the quantity of Canadian dollars demanded?

A

Exports effect
Expected profit effect

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

What is the Exports Effect?

A

Exchange rate ↓ - Value of Canadian exports ↑ - Qd CAD ↑

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is the Expected Profit Effect?

A

Exchange rate today ↓ - expected profit from buying Canadian dollars ↑ - Qd CAD ↑

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

What does the supply of Canadian currency depend on?

A
  1. The exchange rate
  2. Canadian demand for imports
  3. Interest rates in Canada and other countries (interest rate differential)
  4. The expected future exchange rate
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is the law of supply

A

The higher the exchange rate, the greater is the quantity of Canadian dollars supplied in the foreign exchange market

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

How does the exchange rate influence the quantity supplied of Canadian dollars?

A
  1. Imports effect
  2. Expected profit effect
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What is the imports effect?

A

Exchange rate ↑ - value of Canadian imports ↑ - Canadian dollars supplied ↑

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

What is the expected profit effect?

A

If the expected exchange rate ↑ - expected profit ↑ - Qs CAD ↓

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

What causes a change in Demand for CAD?

A
  1. World demand for Canadian Exports
  2. Interest rate differential
  3. Expected future exchange rate
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

How does the world demand for Canadian exports influence the Demand for CAD?

A

World demand for Canadian exports ↑ - Demand CAD ↑

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

How does the interest rate differential effect the Demand for CAD?

A

Canadian Interest Rate Differential ↑ - Demand CAD ↑

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

How does the expected future exchange rate effect the Demand for CAD?

A

Expected future exchange rate ↑ - Expected future profit ↑ - Demand CAD ↑

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

What factors create a change in the Supply of CAD?

A
  1. Canadian demand for imports
  2. Interest rate differential
  3. Expected future exchange rate
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

How does Canadian demand for imports effect the supply of CAD?

A

Demand for Imports ↑ - Supply of CAD ↑

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

How does the interest rate differential effect the supply of CAD?

A

Interest rate differential ↑ - Supply of CAD ↓

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

How does the expected future exchange rate effect the Supply of CAD?

A

Expected future exchange rate ↑ - Supply of CAD ↓

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

What is Arbitrage?

A

The practice of seeking to profit by buying in
one market and selling for a higher price in another related market

28
Q

What outcomes does Arbitrage achieve in the foreign exchange market?

A

The law of one price
No round-trip profit
Interest rate parity
Purchasing Power Parity

29
Q

What is the law of one price?

A

If an item can be traded in more the one place, the price will be the same in all locations

30
Q

What is no round-trip profit?

A

A round trip is using the currency A to buy currency B, and then using B to buy A. Arbitrage removes profit from all transactions of this type

31
Q

What is the return on a currency?

A

The interest rate on that currency plus the expected rate of appreciation over a given period

32
Q

What is interest rate parity?

A

When the return on two currencies are equal

33
Q

What is purchasing power parity?

A

When 2 quantities of money buy the same quantity of goods and services

34
Q

What is speculation?

A

The expectation of making a profit

35
Q

What is the Real Exchange Rate?

A

The relative price of Canadian-produced goods and services to foreign-produced goods and services
OR
The quantity of real GDP of other countries that a unit of Canadian real GDP buys

36
Q

What is the equation for Real Exchange Rate?

A

(E × P)/P*
E = Exchange Rate
P = Canadian price level
P* = Price level of foreign country

37
Q

Does a change in the quantity of money affect the exchange rate?

A

Yes

38
Q

What are the 3 possible exchange rate policies?

A
  1. Flexible Exchange Rate
  2. Fixed Exchange Rate
  3. Crawling Peg
39
Q

What is Flexible Exchange Rate policy?

A

Exchange rate is decided by market

40
Q

What is Fixed Exchange Rate policy?

A

It pegs the exchange rate at a value decided by the government or central bank

41
Q

How do governments pursue Fixed Exchange Rate policy?

A

If E > Target → Government SUPPLIES (sells) CAD (aka buys a foreign currency with CAD)
If E < Target → Government DEMANDS (buys) CAD (aka buys CAD with foreign currency kept in reserves)

42
Q

What is a Crawling Peg Exchange Rate policy?

A

Fixed exchange rate BUT target changes
Helps avoid wild swings

43
Q

What does a country’s balance of payments account record?

A

International:
- Trading
- Lending
- Borrowing

44
Q

What are the 3 balance of payments accounts?

A
  1. Current Account
  2. Capital and Financial Account
  3. Official Settlements Account
45
Q

What does the Current Account record?

A

= NET Exports
+ Net interest paid abroad
+ Net transfers

46
Q

What does the Capital and Financial Account record?

A

= Foreign investment in Canada
- Canadian investment abroad

47
Q

What does the Official Settlements Account record?

A

The change in Canadian official reserves

48
Q

What are the Canadian Official Reserves?

A

Government’s holdings of foreign currency
if COR ↑ - Official Settlements Account is more negative

49
Q

What does the sum of; Current Accounts + Capital and Financial Account + Official Settlements Account; ALWAYS EQUAL

A

0

50
Q

Current Accounts + Capital and Financial Accounts + Official Settlements Account =

A

0
INGRAIN THIS IN MEMORY, PROF SAYS #1 THING PEOPLE LOSE MARKS IN FINAL

51
Q

What is a Net Borrower?

A

A country that borrows more from the rest of the world than it lends

52
Q

What is a Net Lender?

A

A country that lends more to the rest of the world than it borrows

53
Q

What country do funds flow into, and what country do they flow out of?

A

The country in which the real interest rate is the highest, and out from the country in which the real interest rate is the lowest

54
Q

Is the loanable funds market GLOBAL or NATIONAL?

A

Global. Duh

55
Q

How does a country’s loanable funds market connect to the global market?

A

Through Net Exports

56
Q

If a country’s net exports are NEGATIVE which is larger:
World’s supply of funds OR Funds supplied to world?
Quantity of Loanable Funds OR National Savings?

A

World’s supply of funds to the country is higher
Quantity of loanable funds is higher

57
Q

If a country’s net exports are POSITIVE which is larger:
World’s supply of funds OR Funds supplied to world?
Quantity of Loanable Funds OR National Savings?

A

Funds supplied to the rest of the world is higher
National savings is higher

58
Q

What is a debtor nation?

A

A country that during its entire history has borrowed more from the rest of the world than it has lent to it

59
Q

What is a creditor nation?

A

A country that has invested more in the rest of the world than other countries have invested in it

60
Q

What is the Current Account Balance?

A

Net Exports + Net interest income + Net transfers

61
Q

What is the Government Sector surplus or deficit equal to?

A

Net Taxes - Gov. Expenditure
T - G

62
Q

What is the Private Sector surplus or deficit equal to?

A

Saving - Investment
S - I

63
Q

What is Net Exports equal to in CAB?

A

NX = (T - G) + (S - I)

64
Q

How does the Exchange rate effect the CAB in the Short Run?

A

Nominal Exchange Rate ↓ - Current Account Deficit ↓

65
Q

How does the Exchange rate effect the CAB in the Long Run?

A

Nominal Exchange Rate ↓ - Real Exchange Rate does not change - Current Account Balance does not change

Macroeconomics (12 decks)

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