exam 2 Flashcards
What does the PPP theory ignore that cause problems with its efficacy?
1) Ignores transaction costs2) Trades barriers3) Product differentiation
An firm that is expecting to receive 10,000 euro in five months can hedge by (a) selling a FWD contract or (b) buying a FWD contract?
(a) selling a FWD contract
What does the current account in the BoP include?
Trade in goods/services, income on foreign investments, unilateral transfers. Includes: income on foreign investments (profits received on US assets abroad and paid on foreign assets in the US)
What does the capital account in the BoP include?
Shows the change in the nation’s assets abroad and foreign assets in the nation other than official reserve assets. Includes: FDI, purchase of foreign securities, change in non-bank and bank claims on and liabilities to foreigners.
Increases in the nation’s assets abroad are capital out/inflows, debits or credits, in the current/capital account?
Outflows; Debits to Cap Acct
Reduction in foreign assets in the nation are capital out/inflows, debits or credits, in the current/capital account?
Outflows; Debits to Cap Acct
What are short run reasons for a disequilibrium in the BoP?
Cyclical expansion of national income > increase nation’s imports > reduce exports > = deficit. Likewise, a high rate of inflation > encourage imports/discourage exports. Deficit may also arise from int’l capital flows.
What are the long-run or structural reasons for disequilibrium in the BoP?
Differences in rates of growth, changes in tastes, different rates of technological progress, political economy.
Differentiate auto policy adj mechanisms from auto income adj mechanisms.
Auto policy adj: automatic. Auto income adj: relies on induced variations in national income.
Describe (by monetary approach) what demand for money is.
Md = kPY, where k is the desired ratio of nominal balances
Describe (by monetary approach) what the supply of money is.
Ms = m(D+F)
Under Flex E(r), a deficit leads to an automatic (a) appreciation or (b) depreciation of the nation’s currency? Causing prices to fall or rise? Md to fall or rise?
(a) depreciation causing prices to and Md to rise sufficiently to absorb the the excess supply of money and auto eliminate deficit.
Under Flex E(r), a surplus leads to an automatic (a) appreciation or (b) depreciation of the nation’s currency?
(b) appreciation
What determines the actual exchange value of of the E(r) aside from the above?
Determined by the rate of growth of the money supply and real income in other nations. Eg., assume 0 growth in real income and Md and Ms in the rest of the world. A nation’s growth in excess of that would lead to an increase in prices and an increase in E(r) = depreciation of it’s currency. Conversely, in increase in nation’s Ms that falls short of that increase in real inc and Md = reduce prices and reduce E(r) = appreciation of E(r).
According to the monetarists, depreciation results from (a) excess money growth or (b) insufficient money growth?
(a) excessive M growth
A nation facing greater inflationary pressure (resulting from rapid growth of Ms) will find its E(r) rising or falling?
Rising; E(r) depreciating
The more elastic your Sx/Dx E(r) curves, the smaller or larger the change in E(r) required to restore equilibrium?
More elastic = the smaller the change in E(r) required
If the Sx is elastic, it has a positive or negative slope?
Positive
If the Sx is inelastic, it has a negative or positive slope?
Negative
If Sx is unitary, what slope does it have?
Vertical
If you have a negative Sx curve, but it is less elastic than Dx, is the E(r) stable or unstable?
Neg Sx but less elastic than Dx = Stable
If Dx is the steeper one, is the E(r) stable or unstable?
Unstable
If you have a neg Sx curve that is less elastic than Dx, is E(r) stable or unstable?
Neg Sx + More Elastic than Dx = Stable
If Dx is steeper than Sx, is the E(r) stable or unstable?
Unstable
The less elastic the (a) greater or (b) or lesser depreciation required to restore equilibrium?
(a) the greater
What impact would a depreciation $E(r) have on your domestic price level?
If $ depreciates > Pmports goes up > reduction in Pmports demand > Dx goes down > stimulates domestic production > makes our exports appear cheaper > stimulates domestic mfg > increases price level > INFLATIONARY
The greater the $ depreciation required to reduce deficit the (a) greater or (b) lesser the inflationary pressure?
(a) greater
With the gold standard, you maintained external or internal balance?
External balance, at the expense of internal balance. External balance greater priority than internal.
Describe the elasticity approach.
Based on trade flows; the speed of adj depends on how responsive (elastic) imports and exports are to the the E(r) changes.
