ECO209Y1 Lecture Notes - Lecture 9: Exchange Rate, Capital Outflow, Fiscal Policy

79 views2 pages

lilacoyster158

4 Dec 2017

School

Department

Course

Professor

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

Lecture 9: open economy with flexible exchange rates. Goods market, money market, external sector start in equilibrium. Bp line horizontal at level of international rate of interest i=i* in equilibrium. Causes shift in is curve equivalent to ae nx. Increase in autonomous exports under perfect capital mobility. Deprecation of canadian dollar equivalent to appreciation of exchange rate, and vice versa. Depreciation of canada dollar ( e>0) causes nx to increase. Supply of foreign currency increases, causing depreciation of exchange rate. Depreciation of exchange rate causes imports to increase and exports to decrease, decreasing net exports. As income and domestic interest rise, capital flows ensue, causing further exchange rate depreciation and decreasing net exports. Ultimately, there is no change in aggregate expenditure. Increased exports matched with equivalent increase in imports. While there is no change in level of income, composition changes. Increase in government spending shifts ae up and is out. As production increases and income rises, demand for money increases.

Related Questions

A. In a small open economy in a flexible exchange rate system with perfect capital mobility, there is complete ________ crowding-out of ________ policy.

a) domestic, monetary

b) domestic, fiscal

c) international, fiscal

d) international, monetary

B. If the dollar depreciates against the yen, this tends to ________ our imports of Japanese goods and ________ our exports of goods to Japan, so that our net exports ________.

a) decrease, decrease, decrease

b) increase, decrease, are unchanged

c) decrease, increase, increase

d) decrease, increase, are unchanged

E) increase, increase, increase

C. An increase in the nominal money supply will shift

a) AD up and raise the price level.

b) SAS down and lower the price level.

c) SAS up and raise the price level.

d) AD down and lower the price level.

D. A rise in the price level causes

a) movement down along an LM curve.

b) movement up along an LM curve.

c) the LM curve to shift downward.

d) the LM curve to shift upward.

plumminnow211

6) Which of the following would be the most pessimistic with regard to the ability of the government to reduce unemployment by monetary of fiscal policy? a. Monetarists b. Keynesians c. rational expectations school d. Klingons e. supply-siders

7) Which of the following would tend to increase a country's imports?

a. an increase in the domestic rate of interest

b. an increase in the exchange rate ( i.e an increase in the price of foreign exchange)

c. an increase in domestic income

d. an increase in foreign prices

e. none of the above

8) Which of the following would decrease a country's exports ?

a. a decrease in the exchange rate( i.e a an decrease in the price of foreign exchange)

b. an increase in the domestic rate of interest

c. an increase in domestic price

d. an increase in domestic income

e. none of the above

9) Which of the following would indicate a conflict between the goals of full employment and balance of payments equilibrium ?

a. inflation and a balance of payments deficit

b. unemployment and a balance of payments surplus

c. unemployment and a balance of payments deficit

d. full employment and a balance of payments surplus

e. none of the above would indicate a conflict

10) Which of the following would result if the county's currency depreciated ? a. an increase in both imports and exports

b. a decrease in both imports and exports

c. an increase in imports and a decrease in exports

d. a decrease in imports and an increase in exports

e. a decrease in net capital inflows

11) Under the gold standard, if a nation had a balance of payments surplus, the difference would have been resolved by:

a. gold shipments from the surplus to the deficit country

b.gold shipments from the deficit to the surplus country

c. appreciation of the country's currency in the foreign exchange markets

d. depreciation of the country's currency in the foreign exchange markets

e. human sacrifices in the deficit country

12.Under a system of flexible exchange rates, if a nation had a balance of payments deficit, which of the following would occur ?

a. gold shipment from the surplus to the deficit country

b. gold shipments from the deficit to the surplus country

c. appreciation of the current in the foreign exchange markets

d. depreciation of the currency in the foreign exchange markets

e. the money supply increase

13. Depreciation of a country's currency would generally result in:

a. the aggregate demand curve shifting to the left

b. the aggregate demand curve shifting to the right

c. the aggregate supply curve shifting to the left

d. the aggregate supply curve shifting to the right.

e) both A and B

salmonbutterfly872

Economic Questions, if you have time, explain why that's the answer:

7A. Assume the U.S. dollar and the Canadian dollar are traded in flexible currency markets. Which of the following would cause the U.S. dollar to depreciate relative to the Canadian dollar?

A. Higher price level in Canada relative to the United States.

B. Higher interest rates in the United States relative to Canada.

C. Lower interest rates in the United States relative to Canada.

D. Decreasing GDP in the United States than in Canada.

E. Increasing GDP in Canada relative to the United States.

7B. If an exchange rate is said to be floating, that means it is

A, set by the World Bank.

B. set by the government.

C. set by the market forces of supply and demand.

D. set by the International Monetary Fund.

E. set by individual banks.

7C. When the international value of the U.S. dollar increases,

A. Americans pay more for foreign goods.

B. the U.S. trade deficit decreases.

C. U.S. imports decrease.

D. Americans would demand less foreign currency.

E. U.S. exports decrease.

7D. Suppose interest rates fall in the United States, but they donât fall in other nations. What is the impact on the flow of financial capital, the value of the U.S. dollar, and U.S. net exports (based on the changing value of the dollar)?

Capital Flow / Value of the U.S. dollar / Net Exports

A. Inflow / Appreciate / Increase

B. Inflow / Appreciate / Decrease

C. Outflow / Depreciate / Decrease

D. Outflow / Depreciate / Increase

E. Outflow / Appreciate / Decrease

7E. Which of the following would cause the U.S. dollar (USD) to appreciate as compared to the euro?

A. Interest rates in the United States decrease.

B. American consumers prefer to buy European goods.

C. European consumers boycott American goods.

D. GDP in the European Union decreases.

E. GDP in the European Union increases.

8A.

Which of the following would cause the U.S. dollar (USD) to depreciate as compared to the euro?

A. Interest rates in the United States decrease.

B. Interest rates in the European Union decrease.

C. Price levels in the European Union increase.

D. Price levels in the United States decrease.

E. GDP in the European Union increases.

8B. The U.S. dollar is currently trading for 7 pesos per dollar. If the exchange rate adjusts to 10 pesos per dollar then

A. the U.S. dollar has depreciated.

B. the U.S. dollar has appreciated.

C. the Mexican peso has appreciated.

D. both the Mexican peso and the U.S. dollar have appreciated.

E. both the Mexican peso and the U.S. dollar have depreciated.

8C. Suppose the United States and Brazil sign a free trade agreement. If real interest rates increase in the United States but not in Brazil, which of the following will be true of Brazilian capital flow, exports, and the value of the Brazilian real?

Capital Flow / Exports / Value of Brazilian Real

A.Inflow / Increase / Depreciate.

B. Inflow / Decrease / Appreciate.

C. Outflow / Increase / Appreciate.

D. Outflow / Decrease / Appreciate.

E. Outflow / Increase / Depreciate.

8D. Suppose Europeans began purchasing real assets in the United States. How would this impact the foreign exchange market for the euro and the U.S. dollar price of the euro?

Supply of euro / U.S. dollar Price of euro

A. Increase / Increase

B. Increase / Decrease

C. Decrease / Increase

D. Decrease / Decrease

E. Decrease/ Not Change

9. Suppose U.S. consumers decide they like foreign goods better than they like domestic goods. As a result of this change, which of the following is true?

I. The demand for the U.S. dollar will increase.
II. The demand for the U.S. dollar will decrease.
III. U.S. exports will increase as a result of the changing value of the U.S. dollar.
IV. U.S. exports will decrease as a result of the changing value of the U.S. dollar.

A. I only.

B. I and III only.

C. I and IV only.

D. II and IV only.

E. II and III only.

ECO209Y1 Lecture Notes - Lecture 9: Exchange Rate, Capital Outflow, Fiscal Policy

Document Summary

Get access

Related textbook solutions

Principles of Economics

Principles of Macroeconomics

Principles of Microeconomics

Related Documents

ECO209Y1 Study Guide - Midterm Guide: Interest Rate, Money Supply, Liquidity Trap

ECO209Y1- Final Exam Guide - Comprehensive Notes for the exam ( 26 pages long!)

ECO209Y1 Chapter Notes - Chapter 3: Disposable And Discretionary Income, Shortage, Consumption Function

Related Questions