ECON 2000 Chapter Notes -Floating Exchange Rate, Fixed Exchange-Rate System, Exchange Rate

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emeraldlouse520

27 Dec 2014

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The open economy: the mundell-fleming model and the exchange-rate regime. International flow of goods and services as well as capital are important to consider. Dominant policy paradigm for studying open economy monetary and fiscal policy. Stresses interaction between goods market and money market. Price level assumed to be fixed to show what causes short-run fluctuations in aggregate income. Assumes an open economy (includes effects of international trade and finance) Floating exchange rate: central bank allows the exchange rate to adjust to changing economy conditions. Adopting common currency is the most extreme form of fixed exchange rate: with unique currency, monetary policy can be adjusted more easily. China did not allow value of its currency to float freely against usa dollar: currency keep artificially cheap, making goods more competitive on world markets. Key assumption: small open economy with perfect capital mobility. R = r*; applying law of one price. Y = c(y-t) + i(r*) + g + nx(e) = is*

Related Questions

(a) Use the Mundell-Fleming model of a Small Open Economy under Perfect Capital Mobility to illustrate the efficacy of fiscal and monetary policy under a fixed exchange rate regime and a flexible exchange rate regime. Explain how your conclusion may change if capital mobility is less perfect.

(b) Explain the expectations augmented Phillips curve. According to monetarists, the Phillips curve will hold up in the short term. What do they believe is the case in the long run? Be sure to explain and use diagrams to illustrate clearly.

whitecricket190

Risk that is common to all assets (e.g., common stocks) of a certain type is referred to as

	systematic risk.
	unsystematic risk.
	idiosyncratic risk.
	structural risk.

In an efficient market with rational expectations, the actual price of an asset

Question 28 options:

	will equal its expected price.
	will often be below its expected price.
	will often be above its expected price.
	equals its expected price plus a random error term.

The efficient markets hypothesis

	assumes that market participants form their expectations adaptively.
	applies rational expectations to the pricing of assets.
	applies to the stock market, but not to the bond market.
	indicates that the stock market is efficient, but not rational.

In recent decades, the United States

	was essentially a closed economy.
	was generally a net borrower of foreign funds.
	was generally a net lender abroad.
	experienced a net outflow of savings.

Ms. Smith has 45% of her money in the stock of Green Corp. and the remainder of her money in Blue Corp. Based on historical data, the standard deviation for Green Corp. stock is 30% and the standard deviation for Blue Corp. is 15%. Security analysts estimate the correlation between Green and Blue as 0.55. What is the standard deviation of Ms. Smith's portfolio?

	0.112
	0.175
	0.037
	0.193

An open economy is one that

	has a large government sector.
	lends and borrows in the international capital market.
	produces mainly agricultural goods.
	produces mainly manufactured goods.

The world real interest rate is

	set annually by a special commission at the United Nations.
	set annually by a special commission at the International Monetary Fund.
	determined in the international capital market.
	determined daily on the New York Stock Exchange.

A small open economy

	is unable to affect the world real interest rate by its borrowing and lending decisions.
	will always be a net borrower from abroad.
	will always be a net lender abroad.
	is almost never able to borrow abroad.

violetleopard499

With the heavy focus on trade with China, it may be surprising to discover that Canada is the USA's largest trading partner. Perhaps it is not the amount of trade between the US and China that is such a great concern as much as the growth of the trade, the corresponding imbalances, and China's currency valuations.

The yuan renminbi is the official currency of China. It has been historically fixed and controlled by the Chinese government, but that may be changing. As China becomes a greater global exporter and economic powerhouse, critics are claiming that the currency is being undervalued and manipulated in an attempt to protect domestic markets. There are additional levels of complexity impacting China as the nation must deal not only with the economic competition but also internal political and social pressures. As China continues to loosen capital controls, there is fear that the government may lose control of inflation and interest rates, thereby causing a great deal of labor and social unrest, while negatively impacting China's competitive advantages. There are currently platforms in place to increase the circulation of the yuan, but those platforms are currently limited and severely restricted.

China is a leader in international world trade, a major exporter, and currently holds the largest foreign exchange reserve in the world. The nation has one of the highest GDPs in the world and is increasing its economic power. Is it fair for China to fix its currency by undervaluing it on the market? How does keeping its exchange rate undervalued give it a favorable position in international trade? What about from the viewpoint of consumers?

Why is the Chinese government hesitant to open the yuan to market forces to determine its value (floating exchange rate) inside and outside of China?

We often talk about manufacturing and goods related to trade with China. What information can you find on trade in services between the two countries?

ochrecrow336

ECON 2000 Chapter Notes -Floating Exchange Rate, Fixed Exchange-Rate System, Exchange Rate

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