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Principles of Economics > Week 10 > Flashcards

Week 10 Flashcards

1
Q

What is international trade?

A

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

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2
Q

What is required to buy goods from another country?

A

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

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3
Q

What is the exchange rate?

A

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

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4
Q

Define nominal exchange rate.

A

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

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5
Q

Define real exchange rate.

A

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

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6
Q

How is the nominal exchange rate denoted?

A

e

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7
Q

How is the real exchange rate denoted?

A

ε

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8
Q

What is appreciation in terms of currency?

A

When a currency increases in value relative to other currencies.

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9
Q

What is depreciation in terms of currency?

A

When a currency decreases in value relative to other currencies.

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10
Q

What does the trade balance (net exports) represent?

A

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

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11
Q

What is the value of exports (EX)?

A

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

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12
Q

What is the value of imports (IM)?

A

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

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13
Q

What does NX = 0 indicate?

A

A country has balanced trade.

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14
Q

What does NX > 0 indicate?

A

A country is a net exporter.

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15
Q

What does NX < 0 indicate?

A

A country is a net importer.

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16
Q

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

A

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

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17
Q

What is a credit item in the B of P?

A

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

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18
Q

What is a debit item in the B of P?

A

Any transaction which leads to a payment to foreigners.

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19
Q

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

A

Trade in goods and services

Capital movements

Financial flows

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20
Q

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

A

Trade in goods and services.

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21
Q

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

A

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

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22
Q

What does the financial account contain?

A

Foreign direct investment (FDI)

Portfolio investment

Transactions in financial derivatives

The use of reserve assets

‘Other’ investment

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23
Q

What are autonomous transactions?

A

Transactions undertaken ‘for their own sake’.

24
Q

What are accommodating transactions?

A

Transactions undertaken for B of P purposes.

25
Q

What does the open economy national income identity express?

A

Y = C + I + G + NX.

26
Q

What does a negative NX indicate?

A

Domestic spending exceeds output, resulting in a trade deficit.

27
Q

What does a positive NX indicate?

A

Output exceeds domestic spending, resulting in a trade surplus.

28
Q

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

A

NCO = capital outflow – capital inflow.

29
Q

What does a balanced NCO mean?

A

NCO = 0

30
Q

What does an NCO surplus indicate?

A

NCO > 0

31
Q

What does an NCO deficit indicate?

A

NCO < 0

32
Q

How are domestic and foreign currency demands interrelated?

A

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

33
Q

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

A

CA + KFA = 0

34
Q

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

A

P -> Overall price level in domestic economy

P* -> Price level in a foreign economy

ε = (e * P) / P*

35
Q

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

A

Net Capital Outflow

NCO is a measure of the supply of domestic currency in the FEM model.

36
Q

How is NCO calculated?

A

NCO = S – I

Where S is savings and I is investment.

37
Q

What does it indicate if NCO is positive?

A

S > I, relatively more domestic currency is supplied

38
Q

What does it indicate if NCO is negative?

A

S < I

39
Q

What determines NCO in the FEM model?

A

The real interest rate from the LFM in the domestic economy

40
Q

What is the demand for domestic currency primarily required for?

A

Buying goods and assets from the domestic economy

41
Q

How does relative demand for domestic currency depend on?

A

The real exchange rate

42
Q

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

A

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

43
Q

What is the effect of expansionary fiscal policy on NCO?

A

Lower NCO

44
Q

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

A

It appreciates and NX worsens

45
Q

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

A

It restricts demand for domestic currency

46
Q

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

A

It shifts to the right

47
Q

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

A

It appreciates but NX is unchanged

48
Q

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

A

The domestic economy is small

There is perfect capital mobility

Domestic and foreign bonds are perfect substitutes

49
Q

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

A

A single interest rate (‘world interest rate’, r*)

50
Q

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

A

It remains unchanged (r = r*)

51
Q

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

A

Lower S results in lower NCO

52
Q

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

A

It appreciates and NX worsens

53
Q

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

A

r* increases

54
Q

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

A

Investment decreases as r* increases

55
Q

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

A

NCO increases as I decreases

56
Q

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

A

It depreciates and NX improves

Principles of Economics (9 decks)

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