Vecka 3 sammanfattningar del 1 Flashcards
What does The purchasing power parity theory, in its absolute form, asserts?
That the exchange rate between countries’ currencies equals the ratio of their price levels, as measured by the money prices of a reference commodity basket.
What is An equivalent statement of PPP?
That the purchasing power of any currency is the same in any country.
What is the law of one price?
It states that under free competition and in the absence of trade impediments, a good must sell for a single price regardless of where in the world it is sold.
What does Proponents of the PPP theory often argue?
That its validity does not require the law of one price to hold for every commodity.
What does The monetary approach to the exchange rate uses to explain long-term exchange rate behavior exclusively in terms of money supply and demand?
PPP
What is a ground thing that The monetary approach finds?
That a rise in a country’s interest rate will be associated with a depreciation of its currency.
What does Relative PPP imply?
That international interest differences, which equal the expected percentage change in the exchange rate, also equal the international expected inflation gap.
What can Deviations from relative PPP be viewed as?
changes in a country’s real exchange rate, the price of a typical foreign expenditure basket in terms of the typical domestic expenditure basket.
What are two theories used to analyze The long-run determination of nominal exchange rates?
- the theory of the long-run real exchange rate
- the theory of how domestic monetary factors determine long-run price levels.
What does A stepwise increase in a country’s money stock leads to?
a proportional increase in its price level and a proportional fall in its currency’s foreign exchange value.
What does Supply or demand changes in output markets result in?
exchange rate movements that do not conform to PPP.
What does The interest parity condition equates?
international differences in expected real interest rates to the expected change in the real exchange rate. Real interest parity also implies that international differences in nominal interest rates equal the difference in expected inflation plus the expected percentage change in the real exchange rate.
What does The aggregate demand for an open economy’s output consists of ?
- consumption demand,
- investment demand,
- government demand,
- the current account (net export demand).
What is An important determinant of the current account?
the real exchange rate, the ratio of the foreign price level (measured in domestic currency) to the domestic price level.
What is Output determined by in the short run?
the equality of aggregate demand and aggregate supply.
