Vecka 3 sammanfattningar del 3 Flashcards
What does a fiscal expansion Under a fixed exchange rate do?
it forces central bank purchases of foreign assets and an expansion of the money supply.
What does Devaluation do in the short term?
raises aggregate demand and the money supply.
What does fiscal expansion policy do In the long run?
It causes a real appreciation, an increase in the money supply, and a rise in the home price level,
What does a devaluation causes in the long-run?
Levels of the money supply and prices rise in proportion to the exchange rate change.
When does Balance of payments crises occur?
When market participants expect the centralbank to change the exchange rate from its current level. If the market decides a devaluation is coming, the domestic interest rate rises above the world interest rate and foreign reserves drop sharply as private capital flows abroad.
When can Self-fulfilling currency crises occur?
When an economy is vulnerable to speculation. In other circumstances an exchange rate collapse may be the inevitable result of inconsistent government policies.
What does A system of managed floating allow?
The central bank to retain some ability to control the domestic money supply, but at the cost of greater exchange rate instability.
What happens If domestic and foreign bonds are imperfect substitutes?
The central bank may be able to control both the money supply and the exchange rate through sterilized foreign exchange intervention, but there is weak empirical support.
Describe the asymmetry coming with A world system of fixed exchange rates in which countries peg the prices of their currencies in terms of a reserve currency?
The reserve currency country, which does not have to fix any exchange rate, can influence economic activity both at home and abroad through its monetary policy.
In contrast, all other countries are unable to influence their output or foreign output through monetary policy. This policy asymmetry reflects the fact that the reserve center bears none of the burden of financing its balance of payments.
How can you avoid the asymmetry?
Via A gold standard, in which all countries fix their currencies’ prices in terms of gold. It is inherent in a reserve currency standard and places constraints on the growth of countries’ money supplies. But no empirical evidence that it works.
What does policy makers try to maintain In an open economy?
- internal balance
- external balance
What is internal balance?
- Full employment
- Stable price level
What is external balance?
A current account (CA) level that that is neither so negative that the country may be unable to repay its foreign debts nor so positive that foreigners are put in that position.
What does a country’s ability to reach internal and external balance depends on?
the policies other countries choose to adopt.
What are The limitations known as the monetary trilemma?
It states that countries must choose two of the following three features of a monetary policy system:
- exchange rate stability,
- freedom of cross-border financial flows,
- monetary policy autonomy.
