mod 41
Are exports considered credit or debit?
credit
What determines the exchange rate of a currency?
supply and demand in the foreign exchange market
What is a floating exchange rate?
the government lets the exchange rate go wherever the market takes it
Can fixed exchange rates change?
yes, the government can change them
The first step in macroeconomic structural analysis
starting point
Are imports considered credit or debt?
debit
What is the purchasing power parity?
he nominal exchange rate at which a basket of goods would have the same cost between two countries
What are exchange market interventions?
when a country uses foreign exchange reserves to buy or sell currency to maintain a target exchange rate
Does devaluation reduce the fixed exchange rate or increase it?
reduce it
Country entering / moving out of a recession, An increase / decrease in consumer confidence, an increase / decrease in expected inflation are all examples of
pivotal events
Why do balance of payment transactions affect the foreign currency market?
To import goods (which is part of balance of payment), you need foreign currency
What does it mean when a currency appreciates?
when a currency becomes more valuable in terms of other currencies
If the target exchange rate is above equilibrium, does the interest rate need to be increased or decreased?
increased
Why does revaluation decrease aggregate demand?
Revaluation causes net exports to decrease due to currency being more expensive, so AD decreases
the short-run effects are often called this in macroeconomic structure analysis
initial effects of the event
What should current accounts plus financial accounts be equal to
zero
Why is demand for currency downward sloping?
higher exchange rates means products are more expensive to buyers; people would buy less
What is the purpose of foreign exchange reserves?
to have stocks of foreign currency that can be used to buy a country’s own currency
What effect do lower interest rates have on the exchange rate?
they lead to lower exchange rates (depreciation)
International capital flow and international trade are a part of this
Secondary effects
Why do financial accounts impact the loanable funds market?
capital inflows affect the supply of loanable funds
What is the difference between real exchange rates and nominal exchange rates?
Real exchange rates are adjusted for price differences between countries
What is the main benefit of floating rates?
macroeconomic policy remains unrestricted and can be used to stabilize the economy
Why do lower interest rates lead to lower exchange rates?
Lower interest rates increase investment abroad, decreasing demand and increasing supply for one’s own currency.