Pictures Flashcards
Draw the diagram of the FOREX market equilibrium and explain
Under asset approach to the exchange rate, st moves instantaneously to guarantee foreign exchange market equilibrium at all times (equilibrium given by intersection of two curves)
What is the impact of an increase in it on the FOREX equilibrium diagram
What is the impact of an increase in I*t, ρt, Etst+1 on the FOREX market equilibrium
What is the money market equilibrium diagram
What is the impact of a shock in the money market of mt up and pt down
What is the impact of a shock in the money market of yt up and εt up
(mt-pt = φyt - ηit + εt)
what is the impact of a temporary fiscal shock, gt up under flexible exchange rates
What is the DD curve equation and what does it look like
yt=at+δqt+gt = at+δ(st+p*t-pt)+gt
What is the AA curve equation and what does it look like
mt-pt=φyt - η(i*t+Etst+1-st+pt) + εt, comes from MM equilibrium and FOREX market equilibrium
Explain the exchange rate overshooting using diagrams
From AA-1 to AA0, since m0 up and E0s1 up,
From AA0 to AAN, gradual transition to new LR as pt up hence (mn-pt) down and Etst+1
DD curve shifts from DD0 to DDn as pt up
What is the diagram of a temporary fiscal shock
Starts in output market by increase in g, this increases income and demand for money, equilibrium in mm re-established by increase in I which leads to appreciation, spillover into OM by worsening of CA
What is the effect of a negative at shock under fixed exchange rates
DD contracts, CB reduces the money supply through the AA curve to keep exchange rate fixed
What is the impact of a positive gt shock under fixed exchange rates
DD expands, CB increase money supply through AA curve to keep exchange rate fixed
Would have gone to point like a under flexible but 0 under FER
What is the diagram that shows the currency crisis speculator with money (ht), domestic credit (dt) and reserves (rt)
Diagram of successful speculative attack in terms of st and shadow
Explain the diagram for multiple equilibria in the second generation model
Due to expected future ER higher than the peg with a higher risk premium and not necessarily gov. deficits markets start selling off currency so higher interest rate required, this can only be done by contracting money supply and allowing rates to increase
Diagram that shows the PPF under autarky and what are the intercepts
Diagram that shows home and foreign PPFs under autarky
diagram of world relative supply of cloth 2 country 2 sector
P price of cloth before trade home, p* price of cloth before trade foreign
Diagram of equilibrium in relative world supply of cloth with complete specialisation
Downward sloping demand curve with price on y quantity on x intersect at price pt
Diagram showing expansion of PPFs due to specialisation and gains from trade
Changes relative price of two products so allows each region to specialise what they have comparative advantage in Pt production with international trade, Ct consumption with international trade (bigger than autarky, can consume more of both)
Diagram showing the 2 country 2 good model in terms of relative wage ω
If ωt>A(c) foreign would be least-cost producer of both so no demand for home to produce anything, if A(F)<ωt
Diagram showing home’s relative productivity of labour with RS and RD for 4 goods indexed by 1-4
Home’s productivity highest in product 1, as long as relative wage below A(1) the home will be able to produce at lowest cost. If just between 1 and 2 home could only do product 1 and would have to import rest. If RS’ then could make 1,2,3 foreign only produce 4
Diagram showing RS and RD with a continuum of products
Every time costs and hence price of producing good by home is cheaper than foreign, home will produce. pt(z)=wta(z), pt,*(z)=wt,*a*(z). If pt(z)>pt,*(z) good produced by foreign. RD: ωt=A(z) RS: horizontal left to right no. goods by home, more produced by home greater home’s output to greater wage
Explain the technicalities of the RS curve
An individuals utility is a sum of the utility they get from consuming all products. On average trade between home and foreign will have to be balanced (equal in value)
World income must be equal to total wages
Equation for home income with trade wtL
Capturing z of total spending
What is the impact on the RS and RD in continuum of goods of an increase in Home’s labour force
ωt=(1/1/(z-1))(L*/L) comes at cost of lower wages (shown on y)
What is the impact on RS and RD in continuum of goods of increase in home’s general productivity relative to foreign’s
Increase in output by home and relative wages. RD: ωt=A(z)
Diagram of RS and RD for a good small country
L small bc country small. M low because don’t produce that many goods. Can command a higher relative wage. Note the 1for1
What does this diagram show
Can produce Qbar using all different combinations of T and L. Where you produce depends on the price of the factors. Minimising cost when have tangency. Ratio w/r is the cost of the factors, then T/L is the proportions. As w/r increases from 1->2 increase proportion of land used in production
Draw the diagram with y=w/r and x=L/T showing what happens when the price of labour increases relative to land
Wage increases so use more land in production (less labour) so point moves to the left
Show the cloth and food sectors on a factor proportions diagram with y=T and x=L given factor prices w/r
Angles of the two tangents are the same as they represent factor prices. Food (cloth) is relatively more land (labour) intensive so ratio T/L higher (lower)
Show the cloth and food sectors on a factor proportions diagram with y=w/r and x=T/L
At given w/r level dashed line, food has a higher land/labour ratio
Draw the 2 good 2 factor model for home under autarky y=w/r x=T/L right of axis and x=pc/pf left of axis
Cloth and food produced with different proportions of land and food,
On the left as the price of labour increases (w/r up) the relative price of cloth in relation to food goes up (because cost of producing cloth goes up relatively more). It is concave because of diminishing returns
What is home and foreign’s PPFs under factor proportions under autarky
Home produces more cloth. Foreign produce more food. In the end under autarky both produce similar amounts of each.
What is the impact of trade shown on PPFs for home and foreign for factor proportions
Home opportunity cost for cloth is lower so specialise. Both can have higher standard of living because they have explored their comparative advantage
What is the impact of trade on the diagram y=w/r x=T/L right, x=pc/pf
Relative prices have converged. Downward in case of foreign, up in case of home. After trade equality of prices of two products. After trade home wages increase. foreign its the other way round
Diagram of impact of trade when allowing for differences in technology
If home now effective-labour abundant AL/T>(AL/T)* Convergence of K/AL or T/AL not K/L or T/L
Diagram of allocation of labour before trade for 2 good, 3-factor model
Workers move between sectors until wages equalised. Returns to K (T) triangle above w below VMPLc (VMPLf)
Diagram of 2 good 3-factor after trade in terms of wage rate and labour in each sector
Cloth going to be exported Price of cloth goes up so pc shifts upward so value of MPL up. Economy shifts resources (workers) to cloth sector (increase in x). Returns to capital (left triangle) increase bc capital used in cloth. Returns to land (right triangle) decrease
why is the real wages in units of cloth lower than before after a rise in pc (2 good 3 factor)
real wage: w2/pc2 is equal to the marginal product of labour (not value) which has gone down,
because of diminishing returns - using more workers in cloth sector than before so marginal return (extra units of cloth) lower than before
what happens to real wages in terms of food after a rise in the price of cloth in 2 good 3 factor
real wage measured in units of food w2/p1f=MPL,
moved to point 2 so real wages in terms of food have gone up because lower L in food mean you go up the MPLf curve
with complete specialisation, when home produces cloth under ricardian trade theory. What is home’s relative wage
Show on a diagram the con of FER: no longer a real shock absorber when there is a negative temporary at shock
DD falls, CB has to reduce money supply (AA) otherwise interest rates would change which would change sbar. Output falls more than under flexible
Show negative at-shock under flexible exchange rate (not complicated just one change)
Output decrease less than under fixed
Show impact of a devaluation of a currency under fixed ERs
CB announce willing to buy and sell FOREX reserves at a new higher value. AA shift right to accommodate extra demand. Because net exports increased due to competitiveness
Cannot do this repeatedly will create tension with trading partners
what happened in US between 1980-1985
high inflation (20%),
Volcker hiked interest rates really high,
huge capital inflows leading to appreciation,
hurt US businesses as currency depreciated 30% (hurt margins)
What is the policy trilemma in exchange rates
diagram impact of a permanent shock
LR OM equil condition (ybar=abar+δqbar+gbar), ouput determined by supply side (rhs) in long run, permanent g rise must reduce purchases of other sectors, CA worsens as ED for output appreciates currency which reduces exports and increases imports. (complete crowding-out of net exports (CA)
