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ECON 203 > Topic 12_A Macroeconomic Theory of the Small Open Economy > Flashcards

Topic 12_A Macroeconomic Theory of the Small Open Economy Flashcards

1
Q

Small open economy

A

an economy that trades goods and services with other economies; does not havea big effect on world prices/intererst rates

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2
Q

Perfect Capital Monility

A

when citizens have full acess to world financial markets

(they can do foreign investment)

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3
Q

What kind of economy is Canada

A

small open economy with perfect capital mobilitiy

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4
Q

What does the small open economy + perfect capital mobility imply for a country

A

that if you ignore tax treatments/default risk

the real interest rate in Canada should equal the real interest rate prevailing in the world financial markets

real int rate canada= real int rate world

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5
Q

Interest Rate Parity theory
-type of theory
-definition
-example

A

-theory of how interest rates are determined

=the real interest rate on similar financial assets should be the same in all eocnomies that have access to world financial markets

int rate of a financial asset canada=int rate of financial asset europe

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6
Q

What are limitations to the interest rate parity?

A

1) Real int rate in canada is not ALWAYS equal to real int rate globally

2) financial assets globally are not always perfect subs for each other

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7
Q

Assumptions for a small open economy model

A

1) the elvel of gdp is given
2) the price level is fixed
3) the real int rate= world real int rate

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8
Q

What two markets do you need to focus on when considering an open economy

A

1) Market for loanable funds
2) market for foreign currency exchange

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9
Q

What is savings equal to in a small open eocnomy

A

Savings= Investment+ NCO

Savings = domestic investment + Net capital investment outflow

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10
Q

IS Market for loanable funds in a small open economy w/ perf cap mobility same as a closed eocnomy?

A

no because the real interest rate not just determined by supply and demand of loanable funds

it is determined by the world interest rate

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11
Q

What is real interest rate determined by in a small open economy?

A

WORLD INTEREST RATE!!!

this can put a cieling over the equilbrium, and this can put a floor under equilibrium

WORLD INTEREST RATE IS THE RATE OF ITNEREST

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12
Q

When is world interest rate result in a positive net capital outflow?

A

when it is higher than equilbrium!

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13
Q

when is world interest rate result in a negative net capital outflow?

A

When it is lower than equilbrium

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14
Q

What creates the net capital outflow in supply and demand of loanable funds chart

A

when the quantity of loanable funds made available by savings

does not equal the quantity of loanable funds demanded for

domestic investments

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15
Q

Why does the market for foreign exchange exist?

A

because ppl want to trade goods servvices and financial assets internationally, and be paid in own currency

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16
Q

What is savings equal to in a SOE

A

SAVINGS= INVESTMENT+ NCO!

17
Q

what is SAVINGS in a small open economy

A

S=I+NCO

18
Q

The market for foreign currency exchange
what is supply
what is demand

A

Supply: supply of dollars (NCO)
Savings-Investments

Demand: demand for dollars (NX)

It is balanced by the real exchange rate <3

19
Q

How is NCO= NX

A

balanced by the real exchange rate in the market for foreign currency exchange

20
Q

How to do supply and demand problems

A

1) Does this shift affect the supply curve (savings) or demand curve (investment)
2) How does movement in the real interest rate impact net capital outflow
3) How does movement in the market for loanable funds impact the market for fiegn currency exchange

21
Q

How does a increase in world interest rate affect loanable funds market and market fo rexchange rat

A

1) Higher globala interest rate, means larger NCO
2) Larger NCO means savings>Investment
3) so movement in vertical supply curve to right in the foroeign currency exchange rate amarkter

22
Q

How does a budget deficit affect loanable funds market and market fo rexchange rat ll

A

1) this reduces the amount of savings available in loanable funds market
2) moves supply to the elft in the currency exchange market

23
Q

How does an import quota affect loanable funds market and market fo rexchange rat

A

import quota will increase the demand for dollars

so in the currency exchange market demand increases to right while supply is vertical and still, this makes the exchange rate to rise

this does not impact the real interest rate in any way, so NCO is the same

24
Q

which graph do trade policies affect

A

the currency exchange market <3

25
Q

do trade policises affect the trade balance?

A

NO! they have microeconomic effects only bc some groups are effected

ECON 203 (16 decks)

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