Exchange rate determination models Flashcards
What is the Flexible price monetary model?
The Flexible price monetary model is a model that assumes all prices are flexible, whilst PPP holds at all times.
The Flexible price monetary model links … … movements to a … … … equilibrium
The flexible price monetary model links exchange rate movements to a balance of payments equilibrium.
What are the three assumptions of the flexible price model:
- The aggregate supply curve is vertical
- The demand for real money balances is a stable function of a few domestic macroeconomic variables
- PPP obtains at all times
The … … curve is …
The money supply curve in the flexible price monetary model is vertical
The demand for real money balances is a stable function of…
The demand for real money balance is a stable function of the interest rate
What are the two types of operations authorities can conduct?
Authorities can conduct either Open market operations, or Foreign exchange operations
In order for there to be a complete equilibrium in the flexible price model, which 3 markets are in equilibrium?
- The goods market
- The money market
- The foreign exchange market
In any point above the PPP, the currency is …
In any point above the PPP, the currency is overvalued.
In any point below the PPP, the currency is …
In any point above the PPP, the currency is undervalued.
What is the main influence on the Flexible price model?
The main influence on the flexible price model is imports and exports, and their effect on Price levels and exchange rates.
What are some deficiencies of the flexible price model
Two deficiencies of the flexible price model are that it assumes PPP holds continuously, and that prices are more easily flexible upwards and downwards than they are in real life.
What is the basic principle underlying the Dornbusch model?
The basic principle underlying the Dornbusch model is the concept of sticky prices, meaning prices in goods and labour markets are slow to adjust to changing economic conditions in the short term.
The Dornbusch model assumes that … holds continuously
The Dornbusch model assumes the UIP (Uncovered interest parity), which is the idea that interest rates in different countries will always be equal due to the exchange rate changes, holds.
The Dornbusch model assumes there is an instant adjustment to restore UIP due to … … … and … …
The Dornbusch model assumes there is an instant adjustment to restore UIP due to perfect capital mobility and assets substitutability
In the Dornbusch model, the goods market is characterised by … adjustments
In the Dornbusch model, the goods market is characterised by sticky adjustments