6.1
What factors increase economic growth?
Increases in capital goods, labor force, technology, and human capital
What causes disequilibrium?
Surplus and deficit
What are the determinants of the forex?
Change in tastes, changes in relative income, changes in price level, and changes in interest rates.
How does a central bank purchasing foreign currencies affect its own nation's money supply?
The money supply increases.
The main benefit of free trade between two countries is that?
Each country can consume beyond its constraints of resources and productivity
What are the two accounts in the balance of payment?
Current account and capital and financial account.
What is an exchange rate and how is it determined?
An exchange rate is at which one currency will be exchanged for another. It is based on the supply and demand of one currency versus another.
What outcome would most likely result from a central bank intervention that buys up foreign currencies using its own currency?
Domestic Currency depreciates relative to those of other nations
If the Federal Reserve aims to decrease inflation without causing a significant increase in unemployment, which of the following policy combinations should it most likely implement?
Slightly increase interest rates and sell government securities.
What would be the result if the United States (US) dollar depreciated relative to other currencies?
Net exports: Increase Employment: Increase
When net exports are negative, how do they influence the gross domestic product?
They reduce GDP since imports exceed exports
How could an unexpected appreciation of a nation's currency impact its balance of payments?
It can lead to an improvement in the current account if exports increase and imports decrease due to changed relative prices.
If a country with a large current account deficit implements austerity measures, what is the likely short-term effect on its financial account balance?
The austerity measures may reduce the financial account surplus as there is less need for foreign investment to fund the current account deficit.
Assuming the government of a country imposes a tariff on its imports of foreign goods, what is the likely effect on the country’s currency in foreign exchange markets?
The supply of the currency will decrease and the currency will appreciate.
If the real interest rate decreases what will be the resulting changes in capital flow, net exports, and aggregate demand?
Capital flow: outflow, net exports: Increases, Aggregate Demand Increases
What does net capital outflow refer to?
The difference between the amount of foreign assets purchased by domestic investors and domestic assets purchased by foreigners
How could an unexpected currency depreciation impact a nation's balance of payments?
This may worsen the current account as exports become more expensive and imports cheaper.
Suppose two countries are each capable of individually producing two given commodities. Instead, each specializes by producing the commodity for which it has a comparative advantage and then trades with the other country. Which of the following is most likely to result?
Both countries will become better off
What will occur if a country imposes a tariff on a product that produces and imports?
Employment in the domestic production of the product will increase
Explain how the government's monetary and fiscal policies can influence the loanable funds market and the foreign exchange market
Monetary policy changes interest rates, impacting loanable funds demand. Fiscal policy alters government spending/taxes, affecting loanable funds supply. Both policies influence currency exchange rates through effects on asset demand.
Britain's equilibrium real interest rate increases to 8 percent while Australia's equilibrium real interest rate remains at 4 percent. As a result, financial capital will flow from…
Australia to Britain
How do changes in the exchange rate affect a country's imports and exports?
A weaker domestic currency stimulates exports and makes imports more expensive; conversely, a strong domestic currency hampers exports and makes imports cheaper.
Which of the following is true in the short run if consumers buy more imported goods and fewer domestic goods?
The trade balance moves toward deficit, and equilibrium income decreases
What will the resulting change in Japan’s aggregate supply and aggregate demand be if the Japanese yen's value increases in the foreign exchange market?
AD: Decrease, AS: No change
If the real interest rate decreases what will be the resulting changes in capital flow, net exports, and aggregate demand?
Capital flow: outflow, net exports: Increases, Aggregate Demand Increases