exam 2

Question 1

What does the PPP theory ignore that cause problems with its efficacy?

Answer 1

1) Ignores transaction costs2) Trades barriers3) Product differentiation

Question 2

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?

Answer 2

(a) selling a FWD contract

Question 3

What does the current account in the BoP include?

Answer 3

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)

Question 4

What does the capital account in the BoP include?

Answer 4

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.

Question 5

Increases in the nation’s assets abroad are capital out/inflows, debits or credits, in the current/capital account?

Answer 5

Outflows; Debits to Cap Acct

Question 6

Reduction in foreign assets in the nation are capital out/inflows, debits or credits, in the current/capital account?

Answer 6

Outflows; Debits to Cap Acct

Question 7

What are short run reasons for a disequilibrium in the BoP?

Answer 7

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.

Question 8

What are the long-run or structural reasons for disequilibrium in the BoP?

Answer 8

Differences in rates of growth, changes in tastes, different rates of technological progress, political economy.

Question 9

Differentiate auto policy adj mechanisms from auto income adj mechanisms.

Answer 9

Auto policy adj: automatic. Auto income adj: relies on induced variations in national income.

Question 10

Describe (by monetary approach) what demand for money is.

Answer 10

Md = kPY, where k is the desired ratio of nominal balances

Question 11

Describe (by monetary approach) what the supply of money is.

Answer 11

Ms = m(D+F)

Question 12

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?

Answer 12

(a) depreciation causing prices to and Md to rise sufficiently to absorb the the excess supply of money and auto eliminate deficit.

Question 13

Under Flex E(r), a surplus leads to an automatic (a) appreciation or (b) depreciation of the nation’s currency?

Answer 13

(b) appreciation

Question 14

What determines the actual exchange value of of the E(r) aside from the above?

Answer 14

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).

Question 15

According to the monetarists, depreciation results from (a) excess money growth or (b) insufficient money growth?

Answer 15

(a) excessive M growth

Question 16

A nation facing greater inflationary pressure (resulting from rapid growth of Ms) will find its E(r) rising or falling?

Answer 16

Rising; E(r) depreciating

Question 17

The more elastic your Sx/Dx E(r) curves, the smaller or larger the change in E(r) required to restore equilibrium?

Answer 17

More elastic = the smaller the change in E(r) required

Question 18

If the Sx is elastic, it has a positive or negative slope?

Answer 18

Positive

Question 19

If the Sx is inelastic, it has a negative or positive slope?

Answer 19

Negative

Question 20

If Sx is unitary, what slope does it have?

Answer 20

Vertical

Question 21

If you have a negative Sx curve, but it is less elastic than Dx, is the E(r) stable or unstable?

Answer 21

Neg Sx but less elastic than Dx = Stable

Question 22

If Dx is the steeper one, is the E(r) stable or unstable?

Answer 22

Unstable

Question 23

If you have a neg Sx curve that is less elastic than Dx, is E(r) stable or unstable?

Answer 23

Neg Sx + More Elastic than Dx = Stable

Question 24

If Dx is steeper than Sx, is the E(r) stable or unstable?

Answer 24

Unstable

Question 25

The less elastic the (a) greater or (b) or lesser depreciation required to restore equilibrium?

Answer 25

(a) the greater

Question 26

What impact would a depreciation $E(r) have on your domestic price level?

Answer 26

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

Question 27

The greater the $ depreciation required to reduce deficit the (a) greater or (b) lesser the inflationary pressure?

Answer 27

(a) greater

Question 28

With the gold standard, you maintained external or internal balance?

Answer 28

External balance, at the expense of internal balance. External balance greater priority than internal.

Question 29

Describe the elasticity approach.

Answer 29

Based on trade flows; the speed of adj depends on how responsive (elastic) imports and exports are to the the E(r) changes.