Balance-of- Payments and Exchange-Rate Determination
|
|
- Merry Hill
- 5 years ago
- Views:
Transcription
1 INTERNATIONAL MONETARY AND FINANCIAL ECONOMICS Third Edition Balance-of- Payments and Exchange-Rate Determination Joseph R Daniels David D. VanHoose Elasticities Approach and Absorption Approach Copyright South-Western, a division of Thomson Learning. AH rights
2 Overview of the Elasticities Approach» The elasticities approach emphasizes price changes as a determinant of a nation's balance of payments and exchange rate. The elasticities approach is helpful in understanding the different outcomes that might arise from the short to long run.
3 Traditional Approaches Traditional approaches to balance-of-payments and exchange-rate determination assume that capital flows occur only to finance real-sector transactions. Hence, the quantity of foreign exchange demanded and the quantity of foreign exchange supplied depend only on international transactions of goods and services.
4 The Demand for and Supply of Foreign Exchange 111. " ; _ The demand for a nation's currency is dependent upon foreign residents' demand for its exports, that is, it depends on foreign residents' desire to obtain the domestic currency to facilitate their purchases of the domestic country's exports. The supply of a nation's currency is dependent upon (among other things) domestic residents' demand for imports, that is, when a nation's residents import, they supply the domestic currency as payment.
5 U.S Import Demand and the Demand for the Euro I 1 Q ' c Champagne Imports Demand for Euros (in millions of bottles) (in millions) 1 L- The left-hand panel illustrates an import demand curve for the United States as combinations of the quantities of champagne demanded at various prices. The right-hand panel illustrates the corresponding demand for foreign exchange as combinations of the quantities of foreign exchange demanded at various exchange rates.
6 Review of Elasticity - ZZZZZZ ) Price Elasticity of Demand is a measure of the responsiveness of quantity demanded to a change in price. If quantity demanded is highly responsive to a change in price, then demand is said to be relatively elastic. If quantity demanded is not very responsive to a change in price, then demand is said to be relatively inelastic.
7 Elasticity of Import Demand and the Elasticity of Foreign Exchange Demand c Champagne Imports Demand for Euros (in millions of bottles) (in millions) In the left-hand panel, the import demand curve denoted D' c is more elastic that the demand curve D c. In the right-hand panel, the foreign exchange demand curve denoted D' is more elastic than the foreign exchange demand curve D. 7
8 The Export Supply Curve and the 20 Music CDs (in millions) W c D Supply of Euros (in Millions) The left-hand panel illustrates an export supply curve for the United States as combinations of the quantities of music CDs supplied at various prices. The right-hand panel shows the corresponding supply of foreign exchange as combinations of the quantities of foreign exchange supplied at various exchange rates.
9 Elasticity of Export Supply and the Elasticity of Foreign Exchange Supply Music CDs (in millions) Supply of Euros (in millions) In the left-hand panel, the export supply curve S' CD is more elastic than the supply curve S CD. In the right-hand panel, the foreign exchange supply curve S' is more elastic than the foreign exchange supply curve S.
10 The Effect of Exchange Rate Changes The exchange rate is an important price to an economy. When a nation's currency depreciates, domestic goods become relatively cheaper and foreign goods relatively more expensive in the global market. Hence, we would expect the nation's exports to rise and imports to decline. 10
11 The Responsiveness of Imports and Exports The elasticities approach, therefore, considers the responsiveness of the quantity of imports and the quantity of exports to a change in the value of a nation's currency. For example, if import demand is highly elastic, a depreciation of the domestic currency will cause a relatively larger decline in the nation's imports. 11
12 Surpluses and Deficits It follows that an excess quantity supplied of the domestic currency is equivalent to a current account deficit. Likewise, an excess quantity demanded of the domestic currency is equivalent to a current account surplus. The current account is in balance when the quantity of the domestic currency supplied and the quantity demanded are equal. 12
13 The Account The current account deficit is equivalent to the difference between the quantity of foreign exchange demanded and the quantity of foreign exchange supplied. At the spot exchange rate of 1.00, U.S. residents demand 220 million in foreign exchange and European residents supply 180 million. Hence, the current account deficit is 40 million U.S. Supply and Demand for Euros (in millions)
14 The Role of Elasticity mm 'Iii'l' i - :»r r jjl "J The previous chart illustrated a current account deficit for the United States. The amount of depreciation required to eliminate this deficit depends on elasticity. When demand and supply are relatively more elastic, a smaller deprecation is required to eliminate the current account deficit. 14
15 The Marshall-Lerner Condition Will a depreciation always improve the current account balance? The Marshall-Lerner condition specifies the necessary conditions for the current account to improve. According to this condition, the current account balance will improve if the sum of the elasticity of import demand and the elasticity of export supply exceed unity. 15
16 The J-Curve Effect The current account balance may respond differently to a currency change in the short run relative to the long run. The J-Curve effect refers to a phenomenon in which a depreciation of the domestic currency causes a nation's balance of payment to worsen before it improves. 16
17 The J-Curve Initially there is a current account deficit of $40 million. At time t, the dollar depreciates. In the short run, Surplus. i A A ^ $ millions) import demand and export x ' supply may be inelastic and the current account widens to $48 million. Eventually, as businesses and households 0 D40 D48 have time to adjust their planned expenditures on imports and exports, the deficit improves. Current Account Balance Deficit (in $ millions) 17
18 Pass-Through Effects Pass-through effects are also important to understanding the response of the current account to changes in the exchange rate. A pass-through effect is when the domestic price of an imported good rises following the depreciation of the domestic currency. 18
19 The Absorption Approach The absorption approach emphasizes changes in real domestic income as a determinant of a nation's balance of payments and exchange rate. Because it treats prices as constant, all variables are real measures. 19
20 Expenditures A nation's expenditures fall into four categories, consumption (c), investment (i), government (g), and imports (m). The total of these four categories is referred to as domestic absorption (a) a = c + i + g + m, 20
21 Real Income A nation's real income (y) is equivalent to total expenditures on its output y = c + i + g + x, where x denotes exports. 21
22 The Current Account ) During the time (early Bretton Woods era) that the absorption model was developed, capital flows were not very important. Trade flows, therefore, determined the current account balance. Hence, the current account (ca) is equivalent to ca = x - m. Then, for example, if exports exceed imports, x > m, and the nation is running a current account surplus. 22
23 Current Account Determination The absorption approach hypothesizes that a nation's current account balance is determined by the difference between real income and absorption, which can be written as: y - a = (c+i+g+x) - (c+i+g+m) = x - m, or y - a = ca. 23
24 Contractions and Expansions Though a simple theory, the absorption approach is helpful in understanding a nation's external performance during contractions and expansions. For example, when a nation experiences an economic contraction, does its current account necessarily improve and does its currency definitely appreciate? Does the opposite necessarily hold during an economic expansion? 24
25 Balance of Payments Determination Consider the case of an economic expansion. Real income rises, thereby increasing real expenditures or absorption. Whether the current account balance improves or worsens depends on the relative changes in these two variables. 25
26 Current Account Adjustment ^ If real income rises faster than absorption, then the current account improves Ay > Aa > Aca > 0. If real income rises slower than absorption, then the current account worsens Ay < Aa > Aca < 0. Similar conclusions can be reached for a nation experiencing an economic contraction. 26
27 Exchange Rate Determination The absorption approach can also be used to examine how changes in income affect the value of a nation's currency. Recall that y - a = x - m. For example, if real income is rising faster than absorption, then exports must be increasing relative to imports. Hence, the nation's currency will appreciate. 27
28 Policy Implications A nation may resort to absorption instruments or expenditure switching instruments to correct an external imbalance. The effectiveness of these instruments, however, is uncertain, as can be seen in the model. 28
29 Policy Instruments " : Absorption Instrument: Influences absorption by altering expenditures. Suppose the government reduces its expenditures (g). Absorption will decline as g declines. However, since expenditures decline, so does output. The absorption instrument is effective only if absorption declines faster than output.
30 Policy Instruments, Continued Expenditure Switching Instrument: Alters expenditures among imports and exports by changing relative prices. Suppose the government devalues the domestic currency. Imports are relatively more expensive, and exports are relatively cheaper. If households and businesses switch directly between imports and domestic output without changing overall absorption or income, there is no impact on the current account balance.
31 Conclusion The Absorption Approach emphasizes real income in balance-of-payments and exchange-rate determination. The approach hypothesizes that relative changes in real income or output and absorption determine a nation's balance-ofpayments and exchange-rate performance. It is not clear that expenditure switching and absorption instruments are effective. 31
Assignment 13 (Chapter 14)
Assignment 13 (Chapter 14) 1. According to the absorption approach, the economic circumstances that best warrant a currency devaluation is where the domestic economy faces: a) Unemployment coupled with
More informationInternational Monetary Relations
Part 1: Review the following multiple choice questions to check your understanding of the balance of payments and foreign exchange rates. Question 1: On the balance-of-payments statements, merchandise
More informationn Answers to Textbook Problems
100 Krugman/Obstfeld/Melitz International Economics: Theory & Policy, Tenth Edition n Answers to Textbook Problems 1. A decline in investment demand decreases the level of aggregate demand for any level
More informationChristina Zauner. June 8 th, Department of Economics, University of Vienna. The Goods Market of an Open Economy. Christina Zauner.
Department of Economics, University of Vienna June 8 th, 2011 The for In the final chapter we analyse the equilibrium in the goods market in an open economy Changes in domestic as well as foreign demand
More informationInternational Trade. Balance of Payments
International Trade Balance of Payments Trade statistics As economists we need an overall view of our money transactions with the rest of the world. The government system for analysing this is the Balance
More information(welly, 2018)
a) Use the hypothetical information provided below to record the South African balance of payments transactions, using the double entry bookkeeping procedure. [12] Background information provided in the
More informationEdexcel (B) Economics A-level
Edexcel (B) Economics A-level Theme 3: The Global Economy 3.1 Globalisation 3.1.5 Exchange rate changes Notes Impact of changes in exchange rates and the possible effects on: A reduction in the exchange
More informationChapter 17 (6) Output and the Exchange Rate in the Short Run
Chapter 17 (6) Output and the Exchange Rate in the Short Run Preview Determinants of aggregate demand in the short run A short-run model of output markets A short-run model of asset markets A short-run
More informationEconomics Final Examination December, Part A: Multiple Choice. Choose the best alternative that answer or completes the sentence.
Economics 243-01 Final Examination December, 2000 Instructions: Put your name, social security number and your seat number on the blue book provided. Put all your answers in the blue book provided. Turn
More informationPrepared by Iordanis Petsas To Accompany. by Paul R. Krugman and Maurice Obstfeld
Chapter 16 Output and the Exchange Rate in the Short Run Prepared by Iordanis Petsas To Accompany International Economics: Theory and Policy, Sixth Edition by Paul R. Krugman and Maurice Obstfeld Chapter
More informationFiscal and Monetary Policy in the Growth Model. Introduction
Introduction Fiscal and Monetary Policy in the Growth Model A. Our focus will be on fiscal and monetary policies over a longtime horizon. (ex. 10 years) B. Ex. The federal budget deficit was much higher
More informationBOP Problems and Marshall Lerner condition and J-curve
BOP Problems and Marshall Lerner condition and J-curve Section 4.7 of Matt McGee s Economics In Terms of the Good, the Bad and the Economist Chapter 27, Blink and Dorton s IB Course Companion: Economics
More informationIn an open economy the domestic production (Y ) can be either used domestically or exported. Open economies also import goods for domestic consumption
Chapter 19 - The Goods Market in an Open Economy The International Flows of Goods (Let d and f represents domestic and foreign goods respectively) In an open economy the domestic production (Y ) can be
More informationIntermediate Macroeconomics, EC2201. L4: National income in the open economy
Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department of Economics, Stockholm University Spring 2017 1 / 50 Contents and literature The balance of payments. National
More informationInternational Finance
International Finance 19 1 Balance of Payments International economic transactions Flow of transactions period of time May not involve cash payments Double-entry bookkeeping Credits Inflow of receipts
More informationECON 2123 Review Question 3
ECON 2123 Review Question 3 TA: Mr. Ding Dong May 6, 2018 1 Open Economy Macroeconomics Question 1: Japan produces and exports only cameras, and Saudi Arabia, produces and exports only barrels of oil.
More informationChapter 7 Fixed Exchange Rate Regimes and Short Run Macroeconomic Policy
George Alogoskoufis, International Macroeconomics and Finance Chapter 7 Fixed Exchange Rate Regimes and Short Run Macroeconomic Policy Up to now we have been assuming that the exchange rate is determined
More informationch02 Student: 3. What were the critical foundations of Mercantilist thought? What trade policies resulted from this way of thinking?
ch02 Student: 1. Explain how the price-specie-flow mechanism operates to maintain balanced trade between countries. What are the assumptions that are critical to the mechanism's successful operation? 2.
More informationCHAPTER 17 (7e) 1. Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.
Self-practice (Open Economy) Ch 17(7e): Q1, Q2, Q5 Ch 18(7e): Q1, Q2, Q5, Q7, Ch 20(6e): Q1-Q5 CHAPTER 17 (7e) 1. Using the information in this chapter, label each of the following statements true, false,
More informationOPEN-ECONOMY MACROECONOMICS: BASIC CONCEPTS
18 OPEN-ECONOMY MACROECONOMICS: BASIC CONCEPTS LEARNING OBJECTIVES: By the end of this chapter, students should understand: how net exports measure the international flow of goods and services. how net
More informationAn Introduction to Basic Macroeconomic Markets
An Introduction to Basic Macroeconomic Markets Full Length Text Part: Macro Only Text Part: 3 Chapter: 9 3 Chapter: 9 To Accompany Economics: Private and Public Choice 13th ed. James Gwartney, Richard
More informationOpen Economy I: Concepts
Open Economy I: Concepts 1. Exchange Rates 2. Full Employment Output 3. Interest Rates 1 Exchange Rates Nominal exchange rate E t Cost of domestic currency in terms of foreign currency Foreign-currency
More informationPeriod 3 MBA Program January February MACROECONOMICS IN THE GLOBAL ECONOMY Core Course. Professor Ilian Mihov
Period 3 MBA Program January February 2008 MACROECONOMICS IN THE GLOBAL ECONOMY Core Course Professor SOLUTIONS Final Exam February 25, 2008 Time: 09:00 12:00 Note: These are only suggested solutions.
More informationChapter 19 (8) International Monetary Systems: An Historical Overview
Chapter 19 (8) International Monetary Systems: An Historical Overview Preview Goals of macroeconomic policies internal and external balance Gold standard era 1870 1914 International monetary system during
More information14.02 Quiz 3. Time Allowed: 90 minutes. Fall 2012
14.02 Quiz 3 Time Allowed: 90 minutes Fall 2012 NAME: MIT ID: FRIDAY RECITATION: FRIDAY RECITATION TA: This quiz has a total of 3 parts/questions. The first part has 13 multiple choice questions where
More informationForeign Trade and the Exchange Rate
Foreign Trade and the Exchange Rate Chapter 12 slide 0 Outline Foreign trade and aggregate demand The exchange rate The determinants of net exports A A model of the real exchange rates The IS curve and
More informationInternational Trade in Goods and Assets. 1. The economic activity of a small, open economy can affect the world prices.
Chapter 13 International Trade in Goods and Assets Overview In order to understand the role of international trade, this chapter presents three models of a small, open economy where domestic economic actors
More informationAggregate Supply and Demand
Aggregate demand is the relationship between GDP and the price level. When only the price level changes, GDP changes and we move along the Aggregate Demand curve. The total amount of goods and services,
More informationOPEN-ECONOMY MACROECONOMICS: BASIC CONCEPTS
17 OPEN-ECONOMY MACROECONOMICS: BASIC CONCEPTS LEARNING OBJECTIVES: By the end of this chapter, students should understand: how net exports measure the international flow of goods and services. how net
More informationEdexcel (A) Economics A-level
Edexcel (A) Economics A-level Theme 4: A Global Perspective 4.1 International Economics 4.1.8 Exchange rates Notes Exchange rate systems The exchange rate of a currency is the weight of one currency relative
More informationCIE Economics A-level
CIE Economics A-level Topic 4: The Macroeconomy f) Money supply (theory) Notes Quantity theory of money (MV = PT) The Quantity Theory of Money states that there is inflation if the money supply increases
More information2. (Figure: Change in the Demand for U.S. Dollars) Refer to the information
Name: Date: Use the following to answer questions 1-3: Figure: Change in the Demand for U.S. Dollars 1. (Figure: Change in the Demand for U.S. Dollars) Refer to the information in the figure. The change
More information14.02 Exam 2. April 21, Professor: Francesco Giavazzi. TAs: Joaquin Blaum, Fernando Duarte, Maya Eden, Camilo García, Anna Zabai
4.02 Exam 2 April 2, 20 Professor: Francesco Giavazzi. TAs: Joaquin Blaum, Fernando Duarte, Maya Eden, Camilo García, Anna Zabai tudent Name: ection: Multiple Choice Questions (5 points each). Under a
More informationThe benefits of free trade: an introduction
The benefits of free trade: an introduction Dr Alexey Kravchenko Trade, Investment and Innovation Division United Nations ESCAP kravchenkoa@un.org A Simple Economic Model: Production Possibility Frontier
More informationSimultaneous Equilibrium in Output and Financial Markets: The Short Run Determination of Output, the Exchange Rate and the Current Account
Fletcher School, Tufts University Simultaneous Equilibrium in Output and Financial Markets: The Short Run Determination of Output, the Exchange Rate and the Current Account Prof. George Alogoskoufis The
More informationECO 352 International Trade Spring Term 2010 Week 3 Precepts February 15 Introduction, and The Exchange Model Questions
ECO 35 International Trade Spring Term 00 Week 3 Precepts February 5 Introduction, and The Exchange Model Questions Question : Here we construct a more general version of the comparison of differences
More informationInternational Linkages and Domestic Policy
International Linkages and Domestic Policy 11 Unit highlights: The basis of and gains from international trade Concept of absolute advantage and comparative advantage Balance of paymets Exchange rate system
More informationAnswers to Questions: Chapter 7
Answers to Questions in Textbook 1 Answers to Questions: Chapter 7 1. Any international transaction that creates a payment of money to a U.S. resident generates a credit. Any international transaction
More informationThe Mundell Fleming Model. The Mundell Fleming Model is a simple open economy version of the IS LM model.
International Finance Lecture 4 Autumn 2011 The Mundell Fleming Model The Mundell Fleming Model is a simple open economy version of the IS LM model. I. The Model A. The goods market Goods market equilibrium
More information2007 Thomson South-Western
Application: The Costs of Taxation Welfare economics is the study of how the allocation of resources affects economic wellbeing. Buyers and sellers receive benefits from taking part in the market. The
More informationForeign exchange market based on chapter 14 (Exchange Rates and the Foreign Exchange Market: An Asset Approach) of the textbook
HOMEWORK 6 (ASSET MARKETS) ECO41 FALL 2011 UDAYAN ROY Each correct answer is worth 1 point. The maximum score is 20 points. This homework assignment is due on Wednesday, December 7. Please show your answers
More informationPractice Problems 30-32
Practice Problems 30-32 1. The budget balance is calculated as: A. T G TR B. T + G TR C. T G + TR D. T + G + TR E. TR T G 2. The government budget balance equals: A. Taxes + Government purchases + Government
More informationChapter 18 - Openness in Goods and Financial Markets
Chapter 18 - Openness in Goods and Financial Markets Openness has three distinct dimensions: 1. Openness in goods markets. Free trade restrictions include tari s and quotas. 2. Openness in nancial markets.
More informationFoundations of Modern Macroeconomics Third Edition
Foundations of Modern Macroeconomics Third Edition Chapter 2: The open economy Ben J. Heijdra Department of Economics, Econometrics & Finance University of Groningen 13 December 2016 Foundations of Modern
More informationSample Exam Questions/Chapter 7
Sample Exam Questions/Chapter 7 1. A tax of $20 on an income of $200, $40 on an income of $300, and $80 on an income of $400 is: A) progressive. B) proportional. C) regressive. D) constant-rate. 2. A tax
More informationInternational Economics Prof. S. K. Mathur Department of Humanities and Social Science Indian Institute of Technology, Kanpur. Lecture No.
International Economics Prof. S. K. Mathur Department of Humanities and Social Science Indian Institute of Technology, Kanpur Lecture No. # 05 To cover the new topic, exchange rates and the current account.
More informationPrices and Output in an Open Economy: Aggregate Demand and Aggregate Supply
Prices and Output in an Open conomy: Aggregate Demand and Aggregate Supply chapter LARNING GOALS: After reading this chapter, you should be able to: Understand how short- and long-run equilibrium is reached
More information19.2 Exchange Rates in the Long Run Introduction 1/24/2013. Exchange Rates and International Finance. The Nominal Exchange Rate
Chapter 19 Exchange Rates and International Finance By Charles I. Jones International trade of goods and services exceeds 20 percent of GDP in most countries. Media Slides Created By Dave Brown Penn State
More informationProfessor Christina Romer SUGGESTED ANSWERS TO PROBLEM SET 6
Economics 2 Spring 2017 Professor Christina Romer Professor David Romer SUGGESTED ANSWERS TO PROBLEM SET 6 1.a. The main tool we use to analyze short-run fluctuations in the economy is the Keynesian cross.
More informationTutorial letter 204/1/2016. Macroeconomics ECS2602. Department of Economics Semester 1. Answers to Assignment 04
ECS2602/204/1/2016 Tutorial letter 204/1/2016 Macroeconomics ECS2602 Department of Economics Semester 1 Answers to Assignment 04 Answers to Self-assessment Assignment 05 Dear student In this tutorial letter
More informationThe International Monetary System
The International Monetary System Eiteman et al., Chapter 2 Winter 2004 Outline of the Chapter Currency Terminology History of the International Monetary System Contemporary Currency Regimes Emerging Markets
More information3. If the price of a British pound increases from $1.50 per pound to $1.80 per pound, we say that:
STUDY GUIDE FINAL ECO41 FALL 2013 UDAYAN ROY Ch 13 National Income Accounting See the questions in Homework 7 and Homework 8. CHAPTER 14 Exchange Rates and Interest Parity 1. How many dollars would it
More informationUNIVERSITY OF LUSAKA
UNIVERSITY OF LUSAKA FACULTY OF OMICS, BUSINESS & MANAGEMENT UNDERGRADUATES PROGRAM INTERNATIONAL FINANCE ECF440/BF310 COURSE MODULE TABLE OF CONTENTS UNIT 1: THE BALANCE OF PAYMENTS... 4 COMPOSITION OF
More informationChapter 17: Macroeconomics in an Open Economy
Chapter 17: Macroeconomics in an Open Economy Yulei Luo SEF of HKU April 16, 2012 Learning Objectives 1. Explain how the balance of payments is calculated. 2. Explain how exchange rates are determined
More informationIntroduction to Economics. MACROECONOMICS Chapter 6 International Economics
Introduction to Economics MACROECONOMICS Chapter 6 International Economics contents 6.1 6.2 6.3 6.4 6.5 6.6 Theory of Comparative Advantage Gains from International Trade Trade Barriers Balance of Payments
More informationClass Notes. Chapter 5 Saving and Investment in the Open Economy Learning Objectives
1 Chapter 5 Saving and Investment in the Open Economy Learning Objectives A. Explain how the balance of payments is calculated (Sec. 5.1) B. Discuss goods market equilibrium in an open economy (Sec. 5.2)
More informationAggregate Demand, Output, and the Current Account in the Short Run
Fletcher School, Tufts University Aggregate Demand, Output, and the Current Account in the Short Run Prof. George Alogoskoufis Aggregate Demand, Output Determination and the Exchange Rate We shall now
More informationProblem Set 2 Outline of Answers
Advanced International Trade Prof. A. Waldkirch EC 378 Fall 2006 Problem Set 2 Outline of Answers 1. The table below shows the number of computers and pints of beer that the United States and Ireland can
More informationMacedonia's Balance of Payments
Macedonia's Balance of Payments Macedonia. Use the following Macedonia balance of payments data to answer questions 1 through 4. Note that the data presented in the text is insufficient to answer the question
More informationLecture 5: Flexible prices - the monetary model of the exchange rate. Lecture 6: Fixed-prices - the Mundell- Fleming model
Lectures 5-6 Lecture 5: Flexible prices - the monetary model of the exchange rate Lecture 6: Fixed-prices - the Mundell- Fleming model Chapters 5 and 6 in Copeland IS-LM revision Exchange rates and Money
More informationChapter 4 Monetary and Fiscal. Framework
Chapter 4 Monetary and Fiscal Policies in IS-LM Framework Monetary and Fiscal Policies in IS-LM Framework 64 CHAPTER-4 MONETARY AND FISCAL POLICIES IN IS-LM FRAMEWORK 4.1 INTRODUCTION Since World War II,
More informationEcon 100B: Macroeconomic Analysis Fall 2008
Econ 100B: Macroeconomic Analysis Fall 2008 Problem Set #7 ANSWERS (Due September 24-25, 2008) A. Small Open Economy Saving-Investment Model: 1. Clearly and accurately draw and label a diagram of the Small
More informationMidtermExamII:AnswerSheet
Econ 434 Professor Ickes Fall 2004 MidtermEamII:AnswerSheet 1. (40%) Suppose that the trade balance is given by T = T my +φq, wheret is the autonomous trade balance, m is the marginal propensity to import,
More information1A. Extending Ricardo s CA to Many Goods Ricardo s Problem: Too simplistic.
Please do not cite. Kwan Choi, Spring 2009 1A. Extending Ricardo s CA to Many Goods Ricardo s Problem: Too simplistic. The Ricardian theory with two goods convincingly shows which of the two goods a country
More informationThe Open Economy. (c) Copyright 1998 by Douglas H. Joines 1
The Open Economy (c) Copyright 1998 by Douglas H. Joines 1 Module Objectives Know the major items in the Balance of Payments Accounts Know the determinants of the trade balance Know the major determinants
More informationLearning Objectives. 1. Describe how the government budget surplus is related to national income.
Learning Objectives 1of 28 1. Describe how the government budget surplus is related to national income. 2. Explain how net exports are related to national income. 3. Distinguish between the marginal propensity
More informationAnswer Key Unit 1: Microeconomics
Answer Key Unit 1: Microeconomics Module 1: Methodology: Demand and Supply 1.1.1 The Central Problem of Economics 1 C 2 B For every 3 windows made, 15 gates are given up. This means that when 1 window
More information!!! Current account balance =!!!!!! + (!!!!!! ) Capital account balance =!!!!!!, which is also equal to current account balance when!! =!!!!
ECON 302: Intermediate Macroeconomic Theory (Fall 2014) Discussion Section 10 December 5, 2014 KEY CONCEPTS Chapter 15 Open Economy The budget constraint for the home country is + = + + + + ( ) Current
More information4. SOME KEYNESIAN ANALYSIS
4. SOME KEYNESIAN ANALYSIS Fiscal and Monetary Policy... 2 Some Basic Relationships... 2 Floating Exchange Rates and the United States... 7 Fixed Exchange Rates and France... 11 The J-Curve Pattern of
More informationI. Taxes and Economic Welfare
University of California, Merced ECON 1-Introduction to Economics Chapter 8 Lecture Notes Professor Jason Lee I. Taxes and Economic Welfare How do taxes affect the welfare of a society? We saw in Chapter
More informationReview Questions (with Answers) Lecture 14 Pegging the Exchange Rate
Review Questions (with Answers) Page 1 of 6(7) Review Questions (with Answers) Lecture 14 the Exchange Rate Part 1: Multiple Choice Select the best answer of those given. 1. If the central bank of Mexico
More informationProblems. units of good b. Consumers consume a. The new budget line is depicted in the figure below. The economy continues to produce at point ( a1, b
Problems 1. The change in preferences cannot change the terms of trade for a small open economy. Therefore, production of each good is unchanged. The shift in preferences implies increased consumption
More informationEconS 327 Test 2 Spring 2010
1. Credit (+) items in the balance of payments correspond to anything that: a. Involves payments to foreigners b. Decreases the domestic money supply c. Involves receipts from foreigners d. Reduces international
More information14.02 Solutions Quiz III Spring 03
Multiple Choice Questions (28/100): Please circle the correct answer for each of the 7 multiple-choice questions. In each question, only one of the answers is correct. Each question counts 4 points. 1.
More informationSubject: Economics. Grade / Group: 1201/1202. Teacher s Name: Ana Isabel Almeida L. Semester Examination or Guide: Date:
Westhill Institute Vestigia Nulla Retrorsum Department of Curriculum and Academic Programs Subject: Economics Grade / Group: 1201/1202 Teacher s Name: Ana Isabel Almeida L. Semester Examination or Guide:
More informationMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
Econ 330 Spring 2015: FINAL EXAM Name ID Section Number MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Suppose a report was released today that
More informationEconomics 302 Intermediate Macroeconomic
Economics 302 Intermediate Macroeconomic Theory and Policy (Spring 2010) Lecture 22-25 Apr. 12-Apr. 21, 2010 Foreign Trade and the Exchange Rate Chapter 12 Outline Foreign trade and aggregate demand The
More informationChapter 19 International Monetary Systems: An Historical Overview
Chapter 19 International Monetary Systems: An Historical Overview Copyright 2012 Pearson Addison-Wesley. All rights reserved. Preview Goals of macroeconomic policies internal and external balance Gold
More informationThe Financial System. FINANCIAL INSTITUTIONS IN THE U.S. ECONOMY Financial Markets Stock Market Bond Market
Chapter 26. Saving, Investment, and the Financial System important financial institutions in the U.S. economy. how the financial system is related to key macroeconomic variables. the model of the supply
More informationEconomics 302 (Sec. 001) Intermediate Macroeconomic Theory and Policy (Spring 2012) 4/16/2012. UW Madison
Economics 302 (Sec. 001) Intermediate Macroeconomic Theory and Policy (Spring 2012) 4/16/2012 Instructor: Prof. Menzie Chinn Instructor: Prof. Menzie Chinn UW Madison 19 1 The IS Relation in an Open Economy
More informationLec 1: Introduction. Copyright 2000, South-Western College Publishing
Lec 1: Introduction Copyright 2, South-Western College Publishing Subject Outline Trade Theory Finance International Economics Trade Policy Heckscher-Ohlin Stolper-Samuelson Comparative Advantage Factor
More informationTOPIC 9. International Economics
TOPIC 9 International Economics 2 Goals of Topic 9 What is the exchange rate? NX back!! What is the link between the exchange rate and net exports? What is the trade deficit? How do different shocks affect
More informationProblem Set 5 Answers
Problem Set 5 Answers 14.02 Fall 2001 1 True or false, explain 1. False. It is true for gross exports, since a real devaluation makes domestic goods cheaper and hence increases the demand for them. For
More informationA Glossary of Terms and Concepts In International Finance
SIMON FRASER UNIVERSITY Department of Economics Econ 345 Prof. Kasa International Finance Fall 2004 A Glossary of Terms and Concepts In International Finance 1. Asset Market Approach to Exchange Rate Determination:
More informationChapter 7. Production and Growth Saving, Investment and the Financial System
Chapter 7 Production and Growth Saving, Investment and the Financial System Source: Chapter 25-26 of Principles of Economics textbook (Mankiw) Objectives: By the end of this chapter, students should understand
More informationLECTURE XIV. 31 July Tuesday, July 31, 12
LECTURE XIV 31 July 2012 TOPIC 16 Exchange Rates and Policy BIG PICTURE What are different common exchange rate systems? How can exchange rates be manipulated to affect a country s real variables? What
More informationChapter 17: Output and the Exchange Rate in the Short Run
Chapter 17: Output and the Exchange Rate in the Short Run Krugman, P.R., Obstfeld, M.: International Economics: Theory and Policy, 8th Edition, Pearson Addison-Wesley, 420-459 1 Preview Determinants of
More informationUNIVERSITY OF TORONTO Faculty of Arts and Science. April Examination 2016 ECO 209Y. Duration: 2 hours
UNIVERSITY OF TORONTO Faculty of Arts and Science April Examination 2016 ECO 209Y Duration: 2 hours Examination Aids allowed: Non-programmable calculators only LAST NAME FIRST NAME STUDENT NUMBER DO NOT
More information2. In the short-run international macroeconomic theory developed in the textbook, the AA curve shows
HOMEWORK 9 (CHAPTER 17 OUTPUT AND THE EXCHANGE RATE IN THE SHORT RUN) ECO41 FALL 2015 UDAYAN ROY Each correct answer is worth 1 point. The maximum score is 20 points. This homework is due in class on Monday,
More informationLab #7. Chapter 7 Growth, Productivity, and Wealth in the Long Run
University of Lethbridge - Department of Economics ECON 1012 Introduction to Macroeconomics LAB Instructor: Michael G. Lanyi Lab #7 Chapter 7 Growth, Productivity, and Wealth in the Long Run Answer Sheet
More informationA BASIC UNDERSTANDING OF BALANCE OF PAYMENT
e-issn : 2347-9671, p- ISSN : 2349-0187 Vol - 3, Issue- 7, July 2015 Inno Space (SJIF) Impact Factor : 4.618(Morocco) ISI Impact Factor : 1.259 (Dubai, UAE) A BASIC UNDERSTANDING OF BALANCE OF PAYMENT
More informationUNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Subsidiary Level and Advanced Level
UNIVERSITY F MRIGE INTERNTINL EXMINTINS General ertificate of Education dvanced Subsidiary Level and dvanced Level *2513507310* ENMIS 9708/11 Paper 1 Multiple hoice (ore) May/June 2010 dditional Materials:
More informationPrinciple of Macroeconomics, Summer B Practice Exam
Principle of Macroeconomics, Summer B 2017 Practice Exam 1) If real GDP in a small country in 2015 is $8 billion and real GDP in the same country in 2016 is $8.3 billion, the growth rate of real GDP between
More informationSuggested answers to Problem Set 5
DEPARTMENT OF ECONOMICS SPRING 2006 UNIVERSITY OF CALIFORNIA, BERKELEY ECONOMICS 182 Suggested answers to Problem Set 5 Question 1 The United States begins at a point like 0 after 1985, where it is in
More informationInternational Economics: Theory and Policy
International Economics: Theory and Policy Eleventh Edition Chapter 15 Money, Interest Rates, and Exchange Rates Learning Objectives 15.1 Describe and discuss the national money markets in which interest
More informationOCR Economics A-level
OCR Economics A-level Macroeconomics Topic 4: The Global Context 4.3 Balance of payments Notes Components of the balance of payments The balance of payments is a record of all financial transactions made
More informationPrepared by Iordanis Petsas To Accompany. by Paul R. Krugman and Maurice Obstfeld
Chapter 18 The International Monetary System, 1870-19731973 Prepared by Iordanis Petsas To Accompany International Economics: Theory and Policy, Sixth Edition by Paul R. Krugman and Maurice Obstfeld Chapter
More informationEcon 102 Final Exam Name ID Section Number
Econ 102 Final Exam Name ID Section Number 1. Which of the following is not an accurate statement of core capital goods? A) proxy for business investments B) does not include transportation equipment C)
More informationA Macroeconomic Theory of the Open Economy
CHAPTER 32 A Macroeconomic Theory of the Open Economy Goals in this chapter you will Build a model to explain an open economy s trade balance and exchange rate Use the model to analyze the effects of government
More informationEconomic Policy in PNG:
Economic Policy in PNG: 2010-2020 Institute of National Affairs 30 June 2016 Martin Davies Washington and Lee University and Development Policy Center, Crawford School of Public Policy, Australian National
More information