Lecture 4 - The Open Economy

Question 1

What is openness in goods market?

Answer 1

The ability of consumers and firms to choose between domestic goods and foreign goods. E.g. tariffs/quotas.

Question 2

What is openness in financial markets?

Answer 2

The ability of financial investors to choose between domestic assets and foreign assets. E.g. capital controls.

Question 3

What is openness in factor markets?

Answer 3

The ability of firms to choose where to locate production, and of workers to choose where to work.

Question 4

Since 1960, exports and imports have more than tripled in relation to GDP. The United States have become a much more…

Answer 4

Open economy.

Question 5

Nominal exchange rates between two currencies can be quoted in one of two ways. What are they?

Answer 5

As the price of the domestic currency in terms of the foreign currency: €1.22/£1.
As the price of the foreign currency in terms of the domestic currency: £0.8/€1.

Question 6

What is an appreciation of the domestic currency?

Answer 6

An increase in the price of the domestic currency in terms of the foreign currency.

Question 7

What is a depreciation of the domestic currency?

Answer 7

A decrease in the price of the domestic currency in terms of the foreign currency.

Question 8

What is a fixed exchange rate?

Answer 8

A system in which two or more countries maintain a constant exchange rate between their currencies.

Question 9

In the fixed exchange rate system, revaluations are…

Answer 9

Decreases in the exchange rate.

Question 10

In the fixed exchange rate system, devaluations are…

Answer 10

Decreases in the exchange rate.

Question 11

What is real appreciation?

Answer 11

An increase in the real exchange rate, e.g. an increase in the relative price of
domestic goods in terms of foreign goods.

Question 12

What is real depreciation?

Answer 12

A decrease in the real exchange rate, e.g. a decrease in the relative price of
domestic goods in terms of foreign goods.

Question 13

Give an example of going from bilateral exchange rates (two countries) to multilateral exchange rates.

Answer 13

The multilateral real US exchange rate (or US real exchange rate) requires data on the geographic composition of US trade for both exports and imports.

Question 14

Since 1972 there have been two large…

Answer 14

Real appreciations of the US dollar and two large real depreciations.

Question 15

US and UK nominal interest rates have…

Answer 15

Largely moved together over the last 40 years (1970 - 2015).