Topic 9 - Open economy 1

Question 1

what is opens in goods markets

Answer 1

the ability to choose between domestic goods and foreign goods

Question 2

what is openness in financial markets

Answer 2

the ability to choose between domestic goods and foreign assets

Question 3

what is openness in factor markets

Answer 3

the ability of firms to choose where to locate production and the ability of workers to choose where to work

Question 4

what is a global value chain

Answer 4

the full range of activities that economic actors engage in to bring a product to market

Question 5

what are becoming increasingly important features of the modern economy

Answer 5

trade, openesss and globalisation

Question 6

what is the exchange rate

Answer 6

the price of foreign currency in terms of domestic currency

Question 7

what is appreciation

Answer 7

value of domestic currency has risen, strengthened

Question 8

what is depreciation

Answer 8

value of domestic currency has fallen

Question 9

what was the mini budget crisis

Answer 9

the policies proposed in the mini budget included tax relief for investors and to cut the base rate of income tax

in response to this the market reacted, couldn’t trust the UK

resultantly the pound depreciated to a record low

Question 10

are exchange rates responsive

Answer 10

exchange rates are extremely responsive to situations in the market

Question 11

what is the nominal exchange rate

Answer 11

amount of foreign currency units that can be exchange for a unit of domestic currency
the units are considered in money terms

Question 12

what is the real exchange rate

Answer 12

units of foreign currency per unit of domestic currency in real terms

considers appreciation and depreciation

Question 13

how do you calculate real exchange rate

Answer 13

real exchange rate = nominal exchange rate multiplied by the ratio of prices between the two countries

Question 14

what is the balance of payments

Answer 14

summarises a country’s transactions with the rest of the world, including both trade flows and financial flows

Question 15

what is the current account

Answer 15

deals with payments made to and from the rest of the world

Question 16

what is the capital account

Answer 16

deals with financial transactions made to and from the rest of the world

Question 17

what does opens in financial markets imply

Answer 17

that people face a new financial decision: wether to hold domestic interest paying assets or foreign interest paying assets

Question 18

when deciding where to invest what must be considered

Answer 18

the current exchange rate and the expected exchange rate in one year

Question 19

what is the interest parity condition

Answer 19

provides an intuitive way of thinking about interest rate and exchange rate movements

Question 20

what are the determinants of imports

Answer 20

an increase in domestic income will increase

an increase in the real exchange rate will increase them

Question 21

what are the determinants of exports

Answer 21

increase in foreign incomes will increase exports
increase in real exchange rate will decrease exports

Question 22

what changes to the equation of domestic demand in an open economy

Answer 22

c will now include domestic consumption and imports consumption

Question 23

what are examples of countries who have had a persistent trade deficit

Answer 23

Uk and Us

Question 24

countries that have had a prolonged trade surplus

Answer 24

Germany and china