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Micro Year 1 > Macro 1.2 > Flashcards

Macro 1.2 Flashcards

1
Q

Define: Exchange rate

A

The price of one currency in terms of another

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2
Q

What does the exchange rate diagram look like

A

Normal supply and diagram however the axis are labeled Price of Pounds and Quantity of Pounds

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3
Q

Factors that affect exchange rates

A 
Imports
Export
Speculation
Relative interest rates
Relative inflation rates
FDI
Quantitative easing
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4
Q

Why is currency supplied

A

Imports

Tourism abroad - To use other currencies

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5
Q

Why is currency demanded

A

Exports

Domestic tourism

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6
Q

Fall in supply = _____________

A

Appreciation

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7
Q

Fall in demand =

A

Depreciation

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8
Q

If investors predict an appreciation in the future, they will ______ pounds, causing an ____________ now

A

Buy pounds

Appreciation

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9
Q

Affect of high interest rates on currency value

A

High interest rates - More saving in UK - Appreciation

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10
Q

Which supply curve do exchange rates affect

A

SRAS

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11
Q

How does an appreciation effect imports and exports

A

Cheaper imports and more expensive exports

Causes a decrease in (X-M)

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12
Q

How does FDI affect exchange rates

A

Increase in FDI = Appreciation

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13
Q

How does quantitative easing affect exchange rates

A

Increased supply of currency = Depreciation

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14
Q

Impact of changes in exchange rates

A

Growth and employment
Inflation
FDI flows
Current account

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15
Q

Effect of appreciation on growth

A

Exports more expensive, Imports cheaper
CAUSES
Fewer exports and More imports

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16
Q

Effect of appreciation on inflation

A

Appreciation -> Fall in price level

Imports cheaper - Lower costs - SRAS shifts out - Deflation

Exports more expensive - Fall in export revenue - Decrease in AD - Deflation

17
Q

Effect of appreciation on FDI

A

Appreciation = Less FDI as its more expensive
OR
More FDI if investors think currency will continue to appreciate

18
Q

Effect of appreciation on current account

A

Exports expensive, Cheaper imports = Decrease in X, Increase in M = Current account worsen

19
Q

Overall appreciation leads to

A

Decreased growth and employment - Decrease in inflation

20
Q

Explain the J Curve

A
  • In the short-run, import demand is inelastic
  • Importers can’t immediately respond to changes in exchange rates
  • So in the short run firms have to pay more, but in the long run they can substitute and buy less
21
Q

Explain the Marshall-Lerner Condition

A

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Micro Year 1 (11 decks)

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