Week 10

Question 1

What is international trade?

Answer 1

The buying and selling of goods and services across international boundaries rather than domestically.

Question 2

What is required to buy goods from another country?

Answer 2

You need to convert your domestic currency into the relevant foreign currency.

Question 3

What is the exchange rate?

Answer 3

The rate at which you convert your domestic currency into foreign currency.

Question 4

Define nominal exchange rate.

Answer 4

The price of a domestic currency in terms of a foreign currency.

Question 5

Define real exchange rate.

Answer 5

The cost of domestic goods in terms of foreign goods, considering price levels.

Question 6

How is the nominal exchange rate denoted?

Answer 6

e

Question 7

How is the real exchange rate denoted?

Answer 7

ε

Question 8

What is appreciation in terms of currency?

Answer 8

When a currency increases in value relative to other currencies.

Question 9

What is depreciation in terms of currency?

Answer 9

When a currency decreases in value relative to other currencies.

Question 10

What does the trade balance (net exports) represent?

Answer 10

NX = EX – IM (Net exports = exports – imports)

Question 11

What is the value of exports (EX)?

Answer 11

The value of domestically produced goods and services which are sold abroad.

Question 12

What is the value of imports (IM)?

Answer 12

The value of foreign-produced goods and services which are bought domestically.

Question 13

What does NX = 0 indicate?

Answer 13

A country has balanced trade.

Question 14

What does NX > 0 indicate?

Answer 14

A country is a net exporter.

Question 15

What does NX < 0 indicate?

Answer 15

A country is a net importer.

Question 16

What is the balance of payments (B of P)?

Answer 16

Records all transactions between the residents of a country and the rest of the world over a given time period.

Question 17

What is a credit item in the B of P?

Answer 17

Any transaction that leads to a receipt of payment from foreigners.

Question 18

What is a debit item in the B of P?

Answer 18

Any transaction which leads to a payment to foreigners.

Question 19

List the forms of transactions recorded in the B of P.

Answer 19

Trade in goods and services

Capital movements

Financial flows

Question 20

What is recorded in the current account of the B of P?

Answer 20

Trade in goods and services.

Question 21

What is recorded in the capital account of the B of P?

Answer 21

Capital transfers of non-produced, non-financial assets.

Question 22

What does the financial account contain?

Answer 22

Foreign direct investment (FDI)

Portfolio investment

Transactions in financial derivatives

The use of reserve assets

‘Other’ investment

Question 23

What are autonomous transactions?

Answer 23

Transactions undertaken ‘for their own sake’.

Question 24

What are accommodating transactions?

Answer 24

Transactions undertaken for B of P purposes.

Question 25

What does the open economy national income identity express?

Answer 25

Y = C + I + G + NX.

Question 26

What does a negative NX indicate?

Answer 26

Domestic spending exceeds output, resulting in a trade deficit.

Question 27

What does a positive NX indicate?

Answer 27

Output exceeds domestic spending, resulting in a trade surplus.

Question 28

What is the formula for net capital outflow (NCO)?

Answer 28

NCO = capital outflow – capital inflow.

Question 29

What does a balanced NCO mean?

Answer 29

NCO = 0

Question 30

What does an NCO surplus indicate?

Answer 30

NCO > 0

Question 31

What does an NCO deficit indicate?

Answer 31

NCO < 0

Question 32

How are domestic and foreign currency demands interrelated?

Answer 32

Domestic citizens require foreign currency for IM and CO; foreign citizens require domestic currency for EX and CI.

Question 33

Fill in the blank: The relationship between CA and KFA is expressed as _______.

Answer 33

CA + KFA = 0

Question 34

What's the association between the two types of exchange rate?

Answer 34

P -> Overall price level in domestic economy P* -> Price level in a foreign economy ε = (e * P) / P*

Question 35

What does NCO stand for in the Foreign Exchange Market Model?

Answer 35

Net Capital Outflow ## Footnote NCO is a measure of the supply of domestic currency in the FEM model.

Question 36

How is NCO calculated?

Answer 36

NCO = S – I ## Footnote Where S is savings and I is investment.

Question 37

What does it indicate if NCO is positive?

Answer 37

S > I, relatively more domestic currency is supplied

Question 38

What does it indicate if NCO is negative?

Answer 38

S < I

Question 39

What determines NCO in the FEM model?

Answer 39

The real interest rate from the LFM in the domestic economy

Question 40

What is the demand for domestic currency primarily required for?

Answer 40

Buying goods and assets from the domestic economy

Question 41

How does relative demand for domestic currency depend on?

Answer 41

The real exchange rate

Question 42

What happens to the saving curve during expansionary fiscal policy in the LFM model?

Answer 42

It shifts to the left, resulting in a higher real interest rate

Question 43

What is the effect of expansionary fiscal policy on NCO?

Answer 43

Lower NCO

Question 44

What happens to the real exchange rate (ε) during expansionary fiscal policy?

Answer 44

It appreciates and NX worsens

Question 45

What effect does an import quota have on demand for domestic currency?

Answer 45

It restricts demand for domestic currency

Question 46

What is the result of an import quota on the NX(ε) curve?

Answer 46

It shifts to the right

Question 47

How does the real exchange rate (ε) change due to an import quota?

Answer 47

It appreciates but NX is unchanged

Question 48

What are the assumptions in the FEM for a small open economy?

Answer 48

The domestic economy is small There is perfect capital mobility Domestic and foreign bonds are perfect substitutes

Question 49

What does the assumption of perfect capital mobility imply in a small open economy?

Answer 49

A single interest rate ('world interest rate', r*)

Question 50

What happens to the real interest rate in a small open economy during domestic expansionary fiscal policy?

Answer 50

It remains unchanged (r = r*)

Question 51

What is the effect of domestic expansionary fiscal policy on savings (S) and NCO?

Answer 51

Lower S results in lower NCO

Question 52

What happens to the real exchange rate (ε) during domestic expansionary fiscal policy in a small economy?

Answer 52

It appreciates and NX worsens

Question 53

What happens to the world interest rate (r*) during expansionary fiscal policy by large open economies?

Answer 53

r* increases

Question 54

How does investment depend on r* in a small economy?

Answer 54

Investment decreases as r* increases

Question 55

What is the relationship between NCO and investment in a small economy?

Answer 55

NCO increases as I decreases

Question 56

What happens to the real exchange rate (ε) during expansionary fiscal policy by large open economies?

Answer 56

It depreciates and NX improves