Extra Flashcards
finding equilibrium level of output
input all numbers, put ys together and solve
does real exchange rate have units?
no b/c cancel out
if PPP holds then
1=(ex10000)/500000 so e=50JPY/USD
capital movements in Jp in 80s
- 1971: new ForEx w/ wide band fluctuations
- 1973: truly flexible ForEx
- post 1980: capital movements allowed unless explicitly prohibited
JPY/USD rate under fixed system
360JPY/USD
US policies effect on exchange rate
- fiscal deficits leads to increase in money demanded
- tight monetary policy leads to decrease in money supplied
- increases IR which creates dollar overvaluation b/c attracted foreign capital
Plaza Agreement
- required deregulation of Jp markets
- JPY/USD rate sharply decreased after 1985
historical ‘covered interest parity’
- held perfectly 1980-4
- JPY/USD rate sharply decreased after 1985
current/capital-acount in Jp in 80s
- increase in Jp current-account surpluses accompnaied by increase in Japanese capital-account deficits 1981-7
- b/c increase in current-account surpluses there is a capital outflow leading to increased capital-account deficits
classical model
- prices and wages flexible
- full employment achieved
- output at potential output
- Say’s law: demandside follows supplyside
Keynesian model
- principle of effective demand: output determined by demandside
- output determines employment
- unemployment can exist
opportunity cost of A in terms of B
A/B
magnitudes of Jp current-account surplus and US current account deficits…monotonically increasing 1981-9
- not
- current account surpluses/GNP declining in Jp around 1986
- current account deficits/GNP declining in US around 1986/7
J-curve mechanism if yen depreciates
- JPY/USD rate increases leads to trade deficits SR
- after time lag export volume increases, import volume decreases leading to surplus
US vs. EC Jp’s trade
- US more important than EC in exports and imports
- exports Jp to US = 34.1%
- imports Jp from US = 22.5%
- both larger than EC
intra-industry trade
- Jp’s IIT much lower than US
- 1987 IIT index (21 sectors) = 0.30 in Jp and 0.67 in US
- new theories suggest that increasing number of varieties of goods increases consumer utility
- however, if Japanese consumers don’t like foreign goods then Jp will import fewer foreign varieties
relative wage of HS:LS workers increased in US and Mex in 80s and 90s
HO model predicts that relative wage of HS:LS workers in US will increase and in Mex. will decrease
capital account balance
capital inflow - capital outflow
purchasing power parity
unit of any given currency should be able to buy same quantity of goods in all countries
current account balance
balance on goods + services + income + current transfer
covered interest parity
(1+RJA)=(1+RUS)(f/s)
- s = spot JPY/USD exchange rate
- f = forward JPY/USD exchange rate
classical theory of money
- classical dichotomy: money and goods side separated
- money supply cannot affect output
- money supply determines price level
- policy increasing money supply just causes inflation
Keynesian theory of money
money and goods side not separated
output determined by interaction b/w goods and money sides
IS = investment savings (demand)
LM = liquidity money (supply)
x-axis = output
y-axis = IR
covered interest parity equality
(1+RJA)=(1+RUS)(f/s)
- LHS > RHS then demand for yen-denominated asset increases
- value of yen increases
- spot rate decreases
- so LHS=RHS again
