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Y3 International money and finance > Exchange rate determination models > Flashcards

Exchange rate determination models Flashcards

1
Q

What is the Flexible price monetary model?

A

The Flexible price monetary model is a model that assumes all prices are flexible, whilst PPP holds at all times.

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2
Q

The Flexible price monetary model links … … movements to a … … … equilibrium

A

The flexible price monetary model links exchange rate movements to a balance of payments equilibrium.

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3
Q

What are the three assumptions of the flexible price model:

A
  • 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
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4
Q

The … … curve is …

A

The money supply curve in the flexible price monetary model is vertical

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5
Q

The demand for real money balances is a stable function of…

A

The demand for real money balance is a stable function of the interest rate

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6
Q

What are the two types of operations authorities can conduct?

A

Authorities can conduct either Open market operations, or Foreign exchange operations

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7
Q

In order for there to be a complete equilibrium in the flexible price model, which 3 markets are in equilibrium?

A
  • The goods market
  • The money market
  • The foreign exchange market
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8
Q

In any point above the PPP, the currency is …

A

In any point above the PPP, the currency is overvalued.

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9
Q

In any point below the PPP, the currency is …

A

In any point above the PPP, the currency is undervalued.

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10
Q

What is the main influence on the Flexible price model?

A

The main influence on the flexible price model is imports and exports, and their effect on Price levels and exchange rates.

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11
Q

What are some deficiencies of the flexible price model

A

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.

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12
Q

What is the basic principle underlying the Dornbusch model?

A

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.

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13
Q

The Dornbusch model assumes that … holds continuously

A

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.

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14
Q

The Dornbusch model assumes there is an instant adjustment to restore UIP due to … … … and … …

A

The Dornbusch model assumes there is an instant adjustment to restore UIP due to perfect capital mobility and assets substitutability

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15
Q

In the Dornbusch model, the goods market is characterised by … adjustments

A

In the Dornbusch model, the goods market is characterised by sticky adjustments

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16
Q

Under the Dornbusch model, PPP only holds in the…

A

Under the Dornbusch model, PPP only holds in the long run

17
Q

The money market schedule shows combinations of the … … and … … that are consistent with an … in the … …

A

The money market schedule shows combinations of the price level and exchange rate that are consistent with an equilibrium in the money market

18
Q

What is “overshooting”?

A

Overshooting is when the exchange rate passes it’s long run equilibrium position in response to an expansion in monetary policy

19
Q

What are some factors that suggest non-money assets from different countries are not likely to be seen as perfect substitutes by investors?

A
  • Differential tax rates/risk
  • Liquidity considerations
  • Political risk
  • Default risk
  • Exchange risk
20
Q

How can/do international transactors minimise exchange risk?

A

International transactors can minimise their exchange risk by holding a portfolio of currencies to use currency substitution to lower risk.

21
Q

What is the general feature of the portfolio balance model?

A

-Demand for money is generalized into demand for assets (Allocated to money, domestic currency bonds and foreign currency bonds)

Y3 International money and finance (9 decks)

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