Unit 9 Flashcards
Balance of Payments
Difference between all money flowing in (credit) and all money flowing out (debit). An accounting system that records all of a country’s international transactions in a given year.
Current Account
- Trades in Goods + Services (net exports)
- Income earned from abroad
- One-way transfers
Capital/Financial Account
-Purchases of foreign financial assets (securities, bonds, shares of stock –> want higher interest rates)
-Foreign direct investment (purchases of physical assets/capital goods)
Exchange Rate
Price at which currencies are traded/price of one nation’s currency in terms of another’s/can be FIXED or FLOATING (usually floating)
Appreciation
The increase in value of a country’s currency with respect to a foreign currency/one USD buys more of a foreign currency and therefore buys more foreign goods/the dollar is said to be “stronger”
Depreciation
The decrease in value of a country’s currency with respect to a foreign currency/one USD buys less of a foreign currency and therefore buys less foreign goods/the dollar is said to be “weaker”
In the market for USD, foreigners…
DEMAND dollars and Americans SUPPLY dollars
Shifters of Supply and Demand in the Foreign Exchange Market
TIPI
1. Tastes + Preferences
2. Changes in Relative Income
3. Changes in Relative Prices (think: inflation)
4. Changes in Relative Interest Rates (money flows to wherever there are high interest rates)
Tariff
Tax on imports
Quota
Limit on the quantity of imports
If a gov increases spending while maintaining current tax rates…
There will be a decline in long-term growth due to CROWDING OUT
If the USD appreciates
-exports dec b/c foreign currency has less buying power in U.S.
-imports inc b/c USD has more buying power abroad
Net Exports: DECREASE
AD: DECREASE
If the USD depreciates
-exports increase
-imports decrease
Net Exports: INCREASE
AD: INCREASE
To appreciate…
Buy own currency / sell foreign currency
To depreciate…
Sell own currency / buy foreign currency
In order to influence exchange rates and the value of a country’s currency, central banks hold…
reserves of foreign currencies, in order to increase the supply of foreign currencies and increase the value of their own currency
International response to Russia’s invasion on Ukraine (3 major components of economic sanctions)
- Restrictions on wealthy individuals
- Removal of Russian banks from SWIFT
- Freezing the assets of Russia’s central bank
How does the Russian central bank hold its foreign currency reserves?
In the form of virtual money held in foreign central banks
What was Russia hoping to do with these foreign currency reserves during the inevitable economic sanctions?
They were going to sell dollars and buy rubles
How did the sanctions undermine Putin’s strategy to protect the Russian currency and support the economy?
The ruble depreciated
Following the rapid depreciation of the ruble, Russian citizens rushed to remove their money from the Russian financial system. Why?
Run on the currency when it depreciated
3 steps Russia has taken to support its currency in face of the sanctions?
- Raise interest rates
- Ban the sale of foreign-owned Russian securities
- Require payment in rubles for Russian exports
Together, these steps have artificially driven up demand for the ruble, allowing it to appreciate.
Concept Quiz Question: Why did Putin believe he had an effective strategy for limiting the impact of sanctions? How would this have been implemented?
Believed he could sell foreign currency and buy ruble to increase the value and appreciate the ruble. He had a ton of foreign currency
Concept Quiz Question: How did the US and its allies undermine Putin’s strategies? What impact have the sanctions had on Russia’s economy?
US and Allies undermined their strategies by freezing their assets in the central banks. This caused depreciation of the ruble
