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Final exam study Flashcards

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1
Q

CA formula

A

y-(C+G+i)
Exp-imp
savings- investments

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2
Q

Financial account formula

A

sales of domestic assets to foreigners- purchase of foreign assets by domestics

FA = outflow- inflow

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3
Q

balance of payment formula

A

CA+FA+KA = 0

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4
Q

Net foreign assets formula (Bt)

A

Stock of foreign assets held by domestic residents- stock of domestic assets held by foreigners

(1+r)*Bt-1 + NXt

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5
Q

What’s the uncovered interest parity (UIP) condition?

A

R$ = R (E) + (Ee $/(E) - E$/(E) )/ E $/(E)

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6
Q

Whats the interest rate parity condition (CIP) ?

A

R$ = R (E) + (F$/(E) - E$/(E) )/ E $/(E)
where F is the forward exchange rate

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7
Q

What’s the purchase power parity?

A

P $ = E $/(E) * p (E)

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8
Q

What’s fisher equation?

A

R $t = R (E)t + expected inflation of t+1 of the us dollar + expected inflation of t+1 of the euro

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9
Q

Whats the aggregate demand ?

A

It’s the DD curve in the E/Y graph, DD= Y, for given level of E, gives the output that leads to equilibrium

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10
Q

What affects the AA curve?

A

The exchange rate shifts the AA curve right if it depreciates, left if it appreciates.

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11
Q

What’s a monetary policy?

A

The central bank changes the supply of monetary assets

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12
Q

What’s a fiscal policy?

A

A change in the amount of government purchases or taxes

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13
Q

what’s the exchange rate passthrough?

A

% by which imports prices change when the value of the domestic currency changes

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14
Q

what’s the fiscal multiplier?

A

% increase in G leads to how much % increase in y

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15
Q

what’s a sterilization?

A

offset of the change in domestic money supply following the purchase/selling of foreign bonds, to keep money supply unchanged = no impact on prices

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16
Q

Why domestic and foreign assets may not be perfect substitutes?

A
  • exchange rate risk; if there is a higher risk of the currency to depreciate than the domestic borrower must pay a higher interest rate to compensate foreign lenders.
  • Default rick; a country’s borrower may default on their loan repayment, lenders will require higher interest rate to compensate.
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17
Q

If the domestic assets are riskier than foreign assets, what will the equilibrium need?

A

A premium to compensate

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18
Q

When the central bank sells domestic bonds, what does it do to the premium?

A

It increase it, the central bank affects the risk premium when sterilizing a foreign market operation. When central bank purchase domestic bonds it decreases the premium. The more the private sector holds bonds, the riskier it it so the higher the premium is.

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19
Q

Name and explain the 5 unconventional monetary policy

A

1- Quantitative easing: CB directly buys long-term government bonds and other securities. Want to reduce long-term interest rates to encourage borrowing and spending.
2- Forward guidance: CB annonces futures paths to affect long-term bond yields.
3- Negative Interest rate: Let the short-run interest rate go slightly negative, banks will owe the Cb so they will shift to other assets driving down the interest rate.
4- Yield Curve Control: CB sets a target to medium-term gov.bonds
5- Reduce/Eliminate Reserve Requirements: CB eliminated reserve requirements for commercial banks to keep their money in the Bank of canada.

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20
Q

What’s the function of the risk premium?

A

p(B-A)
B: total stock of government bonds issued by the gov.
A: Amount of government bonds held by the CB

So p depends on the amount of gov. bonds held by the market.

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21
Q

When the risk premium increase whaat does it do the Exchange rate?

A

The domestic currency depreciates to keep the equality in the UIP.

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22
Q

What are the factors that can move the AA curve?

A

Any factors that shift the money market and foreign exchange market equilibrium shifts the AA curve:

A change in Money supply (increase in Ms shift AA right)
A change in the Expected Echange rate (If the currency is expected to depreciates it shift the AA curve right)
A change in prices (Increase in prices, decreases the supply of real monetary assets, the AA curve will shift left)

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23
Q

What are devaluation and revaluation?

A

changes in the fixed exchange rate caused by the central bank

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24
Q

For Devaluation to occur what does the central bank needs to do?

A

Buy foreign assets

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25
Q

What is self-fulfilling expectations?

A

Investors expect an increase in the domestic currency to devalue, investors will retire their money from domestic investment and demand for domestic investment will decrease.
The central bank will have to sell foreign assets to reduce money supply, to increase the interest rate to keep the E fix.

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26
Q

What are the option the central bank has when facing a self-fulfilling event?

A

Either risk running out of foreign reserves (can break the peg) or devaluate the exchange rate

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27
Q

What are the risk of devaluating the exchange rate?

A

Debt denominated in foreign currency will be costlier to repay = trigger default on private and public debt.
Inspectors may expect new future devaluation (loose credibility)

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28
Q

What is the internal balance goal?

A

price stability and full employment

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29
Q

What is the external balance goal?

A

Avoid too large CA deficits or surpluses

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30
Q

What’s a capital fligth?

A

Assets or money flow out of a country rapidly because of a macroeconomic event.

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31
Q

What is the open-economy Trilemma?

A

You can’t have those 3 simultaneously:
- Exchange rate stability (peg)
- Monetary policy oriented toward domestic goals (Monetary policy independence)
- Free international capital movements

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32
Q

What’s a contingent commitment?

A

If things get bad enough the central bank/government will intervene

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33
Q

What are the benefits of exchange rate flexibility?

A
  • Monetary policy autonomy
    -Automatic stabilization
    -Less volatility
    -May prevent speculation
    -Symmetry (macroeconomic dynamics in the center country may have destabilizing effects in the periphery (pegging country) since this country is using monetary policy for its domestic goals which are different from the pegging country’s goals. )
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34
Q

What is intertemporal trade?

A

Gains from trading goods and services for assets (savers want to buy assets earning a rate of return and borrowers need resources to consume or invest beyond their current income)

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35
Q

What are the 3 types of offshore banking?

A
  1. An agency office located abroad (no deposits, makes loans and transfers; not subject to depository regulations at all )
  2. A subsidiary bank located abroad: follows the regulation of the foreign country
    3.A foreign branch: an office of the home bank located in another country (can take advantage of cross-border regulation differences, carry out the same business as local banks)
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36
Q

What’s an offshore currency deposit?

A

A bank deposit denominated in a currency other than the domestic currency (ex. USD deposit in a london bank)

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37
Q

The shadow banking system is composed of what type of firm?

A

Investment bank providing credit and offer payment services
Money market mutual funds provide check writing services, credit through commercial paper to firms and lend to banks

38
Q

What’s a maturity missmatch?

A

It’s the fact that assets are less liquid than liabilities and due to that, if all depositors withdraw their deposit the bank will be insolvent and this can happen even with a sound balance sheet.

39
Q

What proves that a bank is solvent?

A

assets>liabilities

40
Q

What makes officially a bank insolvent?

A

When their capital is < 0

41
Q

Name 2 things that can make a bank insolvent:

A

liquidity problem
bad performing loans and assets

42
Q

What’s moral hazard?

A

It’s when gov/central bank rescue banks in financial distress, banks may take excessive risk because they are no longer fully responsible for failure.

43
Q

Name and explain the government safeguards against financial fragility.(6)

A
  1. Deposit insurance (up to 100 000$ in CAD)
  2. Reserve requirements
  3. Capital requirements and asset restrictions
  4. Bank surveillance
  5. Lender of last resort (central bank can lend to banks with inadequate reserves to prevent panic)
  6. Government bailouts (purchase of a failing bank)
44
Q

What’s a securitized asset?

A

A combination of different illiquid assets sold as a security. (CDO)

45
Q

What’s the financial Trilemma?

A

When you have financial stability you need to choose between national control over financial regulation or freedom of international movements.

46
Q

What is the Bretton Wood system?

A

Fixed exchange rate against the US $ and fixed price for gold (35$/ounce)

47
Q

What is the EMS?

A

European Monetary System, it’s centerpiece was the Exchange Rate mechanism (ERM) a fixed exchange rate regime based on bands. Germany sets the system’s monetary policy while the other European countries pegged to the DM”

48
Q

What is the Maastricht Treaty?

A

A provision for the introduction of a single European currency and European central bank. It’s started to transform the EMS into a monetary union.

49
Q

The German central bank policies in the EMS (90’) were really:

A

very inflation-averse, tight monetary policy

50
Q

Why did the EU countries move away from the EMS toward the goal of a single shared currency? (4)

A
  • More market integration
    -Reduce germain dominance
    -Give freedom to the movement of capitals within the EU
    -Guarantee political stability of Europe.
51
Q

What were the rules to join European monetary union?(4)

A

Stable exchange rate for at least 2 years
No more than 1,5 percent inflation rate above the average of the 3 member states with the lowest inflation in the previous year
A public deficit not higher than 3% of the GDP
A government debt lower than 60% of GDP

52
Q

What are the 3 criteria affecting the degree of economic integration?

A

Large trade volume/financial assets
Symmetric business cycles
Mobility migration across borders

53
Q

What the graph of the cost of joining a monetary union like?

A

y: Economic stability loss
x: Degree of economic integration between the country and the EA
LL curve is downward slopping since the higher the degree of economic integration, the smaller the economic stability loss.

54
Q

What is involve in economic stability loss?

A

Loss of monetary policy independence (ECB sets the policy for Europe)

Loss of automatic stabilization of the flexible E

55
Q

What is the gain from joining a currency union policy graph like?

A

y: Monetary efficiency gains
x: Degree of economic integration between the country and the EA
GG curve is upward slopping since the higher the degree of economic integration, the higher the economic gains since it reduces the transaction costs and the exchange rate uncertainty.

56
Q

What are the gains from joining a currency union?

A

Avoid uncertainty and international transaction costs: exports and imports are more predictable and returns on assets are less uncertain.

57
Q

What does the intersection between the LL and GG curve represents?

A

The minimum level of integration that will cause the country to join the fixed exchange rte regime. When you go righter, after the cross) the gains exceed the losses.

58
Q

What are the factors reducing the LL?

A

Higher business cycle synchronisation
Higher possible mobility for labor
The more fiscal federalism there is the lower the LL curve (fiscal transfer between members help smooth the effect of asymmetric shocks)

59
Q

Factors increasing the GG?

A

Lack of credibility in controlling inflation inside the country (gain money discipline)
Political benefits

60
Q

What is fiscal federalism in the EU?

A

The transfer of economic resources from members with healthy economies to those suffering economic setbacks.

61
Q

How’s the fiscal federalism level in EU?

A

too small to cushion members countries from adverse economic events

62
Q

Where is the best good market integration between us and eu?

A

US, more trades within the states

63
Q

How can you compare the business cycle synchronisation between the US and EA?

A

smiliar

64
Q

Where is the highest labor mobility, us or ea?

A

From far US, states have high labor mobility and markets are very integrated. No cultural/language barriers which helps.

65
Q

What is the formula to find the actual GDP ?

A

GDP before * (1+g)^x
x being the amount of years

66
Q

What’s the formula to know in how many years will the GDP double?

A

ln(2)/ln(1+g)

67
Q

What is the formula to know when the 2 countries will have the same GDP?

A

t-2000= ln(GDPa/GDPb)/ln((1+gb)/(1+ga))

68
Q

What des seigniorage means?

A

A real resources a government earn when it prints money to use for spending on goods ans services

69
Q

What are the characteristic of developing countries?(6)

A

Government controls the economy
Unsustainable macroeconomic policies (high inflation, volatile y and employment rate)
Lack of financial market that transfer funds from savers to borrowers
Exchange rate controls
Natural resources or agricultural commodities represent an important share of exports
Attempts to circumvent gov. controls, taxes, and regulations favor corrupt practices

70
Q

What are the alternative forms of financial inflows?

A

Debt finance (bond, bank finance and foreign direct investment)
Equity finance (Portfolio equity, official landing)

71
Q

What is the difference between equity and debt finance?

A

Debt finance requires fixed payments regardless of the state of the economy. The cost of equity finance fluctuates depending on agg. demande and output.

72
Q

What does it mean for a loan to be in default?

A

When the borrower of the loan fails to repay on schedule according to a loan contract, without the agreement of the lender

73
Q

Why are developing countries running large surpluses?

A

They have strong desire to accumulate international reserves to protect against a sudden stop of capital inflows.

74
Q

Why may equity finance be preferred to debt finance for developing countries?

A

A fall in domestic income automatically reduces the earnings of foreign shareholders without violating any loan agreement.

75
Q

Name the 3 mains problem of default?

A

Debt crisis (inability to repay debts)
Banking crisis (depositors fear bankruptcy and withdraw all funds leading to liquidity crisis in the banking sectors)
Balance of payment crisis

76
Q

How would you define currency board?

A

The monetary bases is backed entirely by foreign currency and the central bank holds no domestic assets.

77
Q

What is equal under fix exchange rate?

A

the domestic and foreign interest rates

78
Q

Under fixed exchange rate, what does devaluations does to the interest rate in the short run?

A

Under fixed exchange rate a devaluation lowers the interest rate in the short run

79
Q

What does a sudden stop implies?

A

CA turns from negative to positive and savings increase or investment declines

80
Q

In the euro are, the adoption of fiscal federalism would do what to the graph?

A

Shift the LL curve down, reducing the level of economic integration needed to make the euro are optimal

81
Q

What does it means to have capital control?

A

The interest rate parity condition no longer holds and therefore R can be different from R*

82
Q

What is the difference between the nominal interest rate and expected inflation?

A

The real interest rate
R-π e = r

83
Q

Why does a currency union implies that over time real interest rates become more similar across countries?

A

The real interest rate is the difference between nominal rates and expected inflation. Since monetary policy is set by a common central bank, both variables converge over time.

84
Q

What’s the doom loop?

A

It refers to a negative spiral that can result when banks hold sovereign bonds and governments bail out banks, This was a feature in the euro crisis.

85
Q

Why does an increase in foreign currency reserves held by the central bank can denote an overvalued exchange rate parity?

A

In the peg, the central bank would buy foreign bonds to prevent an exchange rate appreciation.

86
Q

Why is inflation constant in the short-run?

A

Because prices are sticky in the short run

87
Q

What does it do to the expected long-run exchange rate when prices will increase in the long-run?

A

Ee depreciates

88
Q

What is the law of one price?

A

Goods have the same price home and in foreign countries once expressed in foreign currency.
Pd = Pf*E

89
Q

If the law of one price doesn’t hold, can the PPP hold?

A

NO

90
Q

If there is a tariff on import good what happens to the demand of domestic goods?

A

It increase since people can’t afford foreign goods anymore, and this leads to an increase in Y leading to right shift of the DD curve meaning an appreciation of the exchange rate.

91
Q

What the formula to find the disposable income?

A

Y-S-Tax
And higher disposable income increase consumption of domestic and imported goods decreasing the CA

Econ & Finance international (1 decks)

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