Chapter 33: International Macroeconomics

equilibrium exchange rates.

All of the following are examples of "compromise" exchange rate regimes EXCEPT:

a.) Sales & purchases of G&S; Payment from foreigners b.) Official asset sales & purchases; Payment to foreigners c.) Factor income; Payment from foreigners d.) Private sales & purchases of assets; Payment from foreigners

Categorize each transaction according to the U.S. account to which it belongs and the direction the money flows. a.) An Australian company buys steel from a U.S. firm. b.) The Federal Reserve buys $2 billion worth of euros. c.) Profits are earned by a U.S. based mining company operating in Mexico. d.) An English company purchases a U.S. confectionary manufacturer.

is a fixed rate policy.

China's exchange rate policy:

TRUE: ?????? FALSE:?????

Classify the statements on capital flows as true or false. ~ True ~ False

foreign exchange

Currencies are traded in the _____ market.

Purchase foreign assets Decrease interest rates Increase interest rates Limit currency purchases of foreigners Subsidize domestic businesses' exports Sell foreign assets??????????????????????????????????????????????????????????????????????????????????????????????????????????????

10.) Starting from a position of equilibrium in the foreign exchange market under a fixed exchange rate regime, how must a government react to an increase in the demand for the nation's goods and services by the rest of the world to keep the exchange rate at its fixed value? Select all effective policies.

¥120

A hamburger costs $8 in the United States and ¥960 in Japan. The nominal exchange rate is ¥110 per dollar. The inflation rates in the United States and in Japan are 2% and 4%, respectively. The purchasing power parity is _____ per dollar.

exchange rate regime

A(n) _____ is a rule governing policy toward the exchange rate.

are stocks of foreign currency that governments maintain to buy their own currency on the foreign exchange market.

All of the following are true regarding foreign exchange controls EXCEPT that they:

for U.S. residents has become more expensive in Europe.

Ariel lives in the United States and is thinking of traveling from the United States to Europe. Suddenly, the exchange rate of euros to the U.S. dollar falls from 1.5 euros to 1 U.S. dollar, to 1.2 euros to 1 U.S. dollar. As a result, traveling:

appreciate.

If exports from the United States increase, then the U.S. dollar will:

-1 trillion dollars.

If the balance on the financial account is $1 trillion, then the balance on the current account is:

U.S. dollar appreciated against the euro.

Suppose that the exchange rate between the U.S. dollar and the euro is 1 U.S. dollar for 1.5 euros. Now, assume that the rate changes to 1 U.S. dollar for 1.8 euros. Taking into account this change, it would be said that the:

U.S. dollar depreciated against the euro.

Suppose that the exchange rate between the U.S. dollar and the euro is 1 U.S. dollar for 2.5 euros. Now assume that the rate changes to 1 U.S. dollar for 1.8 euros. Based on this change, the:

The sale of the bond generates a liability, while the sale of the oranges does not.

Assume that Tom sells a crate of Florida oranges to a retailer in Canada and Susan sells a U.S. bond to a customer in Britain. Which statement illustrates the difference and/or similarity between these two transactions?

lower the domestic interest rate.

Assume that the foreign exchange market is trading the domestic currency at a rate (U.S. dollars per unit of the domestic currency) above the rate fixed by the government. To maintain the fixed exchange rate, the government must:

1.) Depreciate 2.) Appreciate 3.) Appreciate 4.) Depreciate

Consider the exchange rate between Lebanon and Canada. Typically, exchange rates vary over time, sometimes quite dramatically. The scenarios present various changes that may affect the exchange rate. Identify whether each scenario will tend to cause an appreciation, depreciation, or have no effect on the exchange rate of Lebanese pounds relative to Canadian dollars. 1.) The magazine The Economist publishes an article indicating that analysts expect the value of Canadian dollars to rise relative to Lebanese pounds. 2.) The central bank in Lebanon announces that it is going to raise interest rates on government bonds. 3.) Based on a World Bank report, the inflation rate in Lebanon is going to be 0% next year, whereas the inflation rate in Canada is going to be 10.5% . 4.) The price of a specific basket of goods in Lebanon is roughly 1.2 times higher than the price of an identical basket of goods in Canada even after adjusting for the exchange rate.

QUIZ Q'S////////////////////////////////////// The United States will sell assets, generating a liability that obligates Americans to pay for those imports in the future.

If the United States imports more goods from Japan than it exports to Japan, how will the difference be financed?

PRE-CLASS TUTORIAL///////// b) The U.S. dollar appreciates against the yen and Japanese imports become less expensive in terms of dollars.

If the exchange rate between the Japanese yen and the U.S. dollar changes from 90 yen per dollar to 95 yen per dollar, which of the following is true?

a) The supply of Badluckville's currency shifts left, causing its currency to appreciate.

Suppose that an economic recession in Badluckville causes a sharp drop in spending on imports and foreign travel. What would happen in the foreign exchange market?

less than

Suppose that in the foreign exchange market, there is a shortage at the target exchange rate. Therefore, the quantity supplied of the country's currency is _____ the quantity demanded of that country's currency.

remains unchanged at 40.

Suppose that initially the nominal exchange rate was 40 rupees per dollar but it is now 50 rupees per dollar. If the nominal exchange rate is 50 rupees per dollar and the inflation rate in India is 25%, while the aggregate price level has remained unchanged in the United States, the real exchange rate between the U.S. dollar and the Indian rupee:

depreciated.

Suppose that the exchange rate between the U.S. dollar and the euro is 1 U.S. dollar for 1.5 euros. Now assume that the rate changes to 1 U.S. dollar for 1.8 euros. The euro has:

Factor income

_____ is the income that countries pay for the use of factors of production owned by residents of other countries.

financial account is positive.

A country has a financial account surplus if the balance on the:

LEARNING CURVE///////////////// a summary of the country's transactions with other countries.

A country's balance of payments accounts is:

fixed

As of early 2017, China had a _____ exchange rate.

value of a currency in a fixed exchange rate system.

Devaluation is reduction in the:

capital account.

Financial account is synonymous with:

U.S. imports from Mexico

When the U.S. dollar appreciates against the Mexican peso, what is MOST likely to rise?

the value of U.S. assets sold to a foreign country

Which of the following would NOT be included in the U.S. balance of payments on current account?

1.) Low Interest Rates; High Interest Rates 2.) Investment Opportunity; Savings Rates

1.) The loanable fund model says that, other things being equal, capital will tend to flow from countries with ________ to countries with _______. 2.) International differences in the demand for domestic loanable funds are primarily due to variation in _________, whereas differences in the supply of funds generally reflect differences in ______.

a.) GRAPH: (S) shifts RIGHT (D) shifts LEFT (EQ) shifts DOWN b.) The Albernian central bank will be forced to make Albernian assets more attractive by raising the interest rate. This will have a contractionary effect on the Albernian economy.

11.) a.) In the accompanying diagram, shift the demand and/or supply curves and move the equilibrium point to its new position to show how these developments would affect the market for berns. b.) If the Albernian central bank tries to keep the exchange rate fixed, using monetary policy, how will this affect the Albernian economy?

~ 100 ~ ??? ~ ???

4.) In the economy of Popania in 2016, total Popanian purchases of assets in the rest of the world were $300 billion, purchases of Popanian assets by the rest of the world were $400 billion, and Popania exports of goods and services were $350 billion. ~ What was Popania's balance of payments on financial account in 2016? Enter your answer in billions of dollars. Financial account: $___billion ~ What was its balance of payments on current account? Enter your answer in billions of dollars. Current account: $___billion ~ What was the value of its imports? Enter your answer in billions of dollars. ~ Value of imports: $____billion

~ Appreciated against USD: British pound Japanese yen Euro Swiss franc ~ Depreciated against USD: Canadian dollar

7.) Go to http://fx.sauder.ubc.ca/data.html . Using the "Database Retrieval System," determine whether the British pound (GBP), the Canadian dollar (CAD), the Japanese yen (JPY), the euro (EUR), and the Swiss franc (CHF) have appreciated or depreciated against the U.S. dollar (USD) between March 31, 2017 and June 1, 2017. Place each currency according to its change in valuation against the dollar. ~ Appreciated against USD ~ Depreciated against USD

a summary of the country's transactions with other countries.

A country's balance of payments accounts is:

country's balance of payments on goods and services plus net international transfer payments and factor income.

A country's balance of payments on current account refers to the:

II only

A devaluation can help reduce a(n) _____ gap. I. inflationary II. deflationary

II only

A fixed exchange rate: I. leaves monetary policy available for domestic stabilization. II. reduces the uncertainty of international trade.

governmental policy in which the exchange rate is free to fluctuate.

A floating exchange rate is a:

fix the exchange rate of its currency.

A government uses exchange market intervention to:

decrease; decrease

A recession in Europe will cause exports from the United States to Europe to _____, and aggregate demand in the United States to _____.

FIXED: Provides certainty.. Distorts incentives for importing.. Signals a commitment.. FLEXIBLE: Enables policy makers..

Classify each characteristic as relating to a fixed exchange rate regime or a flexible (floating) exchange rate regime. ~ Fixed exchange rate regime ~ Flexible (floating) exchange rate regime

DEVALUATION: Domestic goods become cheaper.. The balance of payment.. Exports are increased REVALUATION: If an inflationary gap.. Imports are increased

Classify each effect as caused by devaluation or revaluation. ~ Devaluation ~ Revaluation

establish a system of fixed exchange rates between major currencies.

Delegates from 44 Allied nations met in 1944 in Bretton Woods, New Hampshire, in order to:

switching to a floating exchange rate.

Governments can fix exchange rates by using all of the following EXCEPT:

they can determine the country's nominal exchange rate.

Governments have much more power to influence nominal exchange rates than they have to influence ordinary prices because:

buying foreign assets.

Governments support the value of their own currency in all the following ways EXCEPT:

balance of payments on financial account rises.

If European investors increase their demand for U.S. dollars because European investors want to increase their investment in U.S. assets, then:

appreciate; depreciate

If U.S. residents increase their demand for Japanese cars, then the Japanese yen will _____, and the U.S. dollar will _____.

current account.

If a student from Spain enrolls at the University of South Carolina and pays tuition, then this transaction would be included in the:

decrease; increase

If the United States is in an inflationary gap, the appropriate policy is to _____ the money supply to _____ interest rates.

1.) An Italian purchase of a hotel room.. Interest on a Spain bank's loan.. 2.) A Spanish company's purchase.. A Spanish central bank's purchase.. 3.) A German purchase of Spanish.. 4.) A Spanish company's purchase.. Profits of a U.S. company..

In the diagram, the outer arrows represent the payments that are counted in the current account, whereas the inner arrows represent the payments that are counted in the financial account. Place the payments along the appropriate arrow. A circular flow diagram between Spain and the rest of the world with four flows running between them. 1.) Flow 1 is current accounts which flows from the rest of the world to Spain. 2.) Flow 2 is financial account which flows from Spain to the rest of the world. 3.) Flow 3 is the current account which flows from Spain to the rest of the world. 4.) Flow 4 is the financial account which flows from the rest of the world to Spain.

floating

Monetary policy is more effective with _____ exchange rates.

equal to

Refer to Figure: International Capital Flows. At an interest rate of 4%, the total quantity of loanable funds demanded across the two markets is _____ the total quantity of loanable funds supplied by lenders.

-$355 billion.

Refer to Table: Balance of Payments. The country's balance of payments on current account is:

increase; decrease

Rising interest rates _____ the demand for domestic currency, and _____ the supply of domestic currency in the foreign exchange market.

increase; decrease

The Republic of Gizmovia wants to maintain the exchange rate of its currency, the gizmo, at $0.50, but the current exchange rate for the gizmo is $0.40. If Gizmovia uses monetary policy to bring the exchange rate for the gizmo to $0.50, it should _____ interest rates, which will _____ capital outflows of gizmos.

Bretton Woods

The _____ system established fixed exchange rates in 1944, but the system broke down in 1971.

GNP includes international factor income.

The difference between GDP and GNP is that:

merchandise trade balance.

The difference between a country's exports and imports of goods, alone, is the:

relative price of currencies

The exchange rate is the _____ between countries.

factor income.

The income that countries pay for the use of factors of production owned by residents of other countries is:

people in other countries who want to buy U.S. goods, services, and assets.

The primary reason for the demand for U.S. dollars in foreign exchange markets comes from:

nominal exchange rate at which a given basket of goods and services would cost the same amount in each country.

The purchasing power parity between two countries' currencies is the:

HOMEWORK/////////////// a.) -215 (Exports - Imports) of GOODS b.) -277 (ALL Exports - ALL Imports)

The table shows the value of exports and imports for the small country of Cherubland. Their chief export is tiny cupid arrows. a.) What is the value of the merchandise trade balance for Cherubland? b.) What is the value of the current account balance for Cherubland?

a.) decrease. b.) perhaps change but in which direction is unclear.

Use the graph to help with answering the questions. The exchange rate refers to the number of yuan needed to purchase one dollar. Suppose the Chinese government decides that investing in the U.S. government is too risky and sells back their U.S. government bonds to the Fed. a.) As a result, the exchange rate will b.) The quantity of dollars traded will

increase; decrease

When a country's currency undergoes a real depreciation, this causes exports to _____, and imports to _____.

the nominal exchange rate will rise.

When the purchasing power parity rate is greater than the nominal exchange rate, then over time, it is MOST likely that:

II only

Which group would supply dollars in the foreign exchange market? I. Americans who want to buy U.S. goods, services, and assets II. Americans who want to buy European goods, services, and assets III. Europeans who want to buy U.S. goods, services, and assets

a factory in Mexico purchased by a U.S. company

Which of the following would be included in the financial account?

b.) Appreciate

b.) The United States imposes some import tariffs on Japanese goods. The dollar will _____.

c.) Appreciate

c.) Interest rates in the United States rise dramatically. The dollar will _____.

d.) Depreciate

d.) A report indicates that Japanese cars last much longer than previously thought, especially compared with American cars. The dollar will _______.

~ GRAPH: (D) shifts RIGHT (S) shifts LEFT ~ a decrease in domestic Chinese aggregate demand, which will be made worse by the change in exchange rates.

~ The diagram shows the market equilibrium exchange rate between the Chinese yuan and the U.S. dollar (USD) under a floating exchange rate regime. Suppose China's central bank decides to increase interest rates. Shift the demand and supply curves as appropriate. ~ This increase in Chinese interest rates will lead to

~ GRAPH: (D) shifts RIGHT ~ the balance of payments on Japan's current account falling as the balance of payments on Japan's financial account rises.

~ The diagram shows the market equilibrium exchange rate between the Japanese yen and the U.S. dollar (USD). Suppose that capital flows from the United States to Japan increase. Shift the demand and supply curves as appropriate. ~ This change in the exchange rate will result in

1.) fixed 2.) floating 3.) of individuals to buy foreign currency. 4.) exchange market intervention. 5.) foreign exchange reserves

1.) A country is said to have this type of exchange rate when its government keeps the exchange rate against other currencies at or near a particular target. 2.) A country is said to have this type of exchange rate when the rate is allowed to move with the market. 3.) Foreign exchange controls are policies that limit the rights 4.) Governments can buy and sell currency internationally through 5.) When a government buys and sells currency internationally, it directly impacts the quantity of what within its country?

There will be reduced uncertainty regarding the value of the country's currency. The government will be prevented from engaging in any inflationary policies.

13.) Your study partner asks you, "If central banks lose the ability to use discretionary monetary policy under fixed exchange rates, why would nations agree to a fixed exchange rate system?" How do you respond? Select all correct responses.

less

Refer to Figure: Change in the Demand for U.S. Dollars. A movement from E2 to E1 in this foreign exchange market would cause Americans to purchase _____ goods and services from Europe.

3

Suppose a basket of goods and services costs 1,200 Mexican pesos in Mexico and 400 U.S. dollars in the United States. In this case, the purchasing power parity is _____ Mexican pesos per U.S. dollar.

increase.

Suppose that the interest rate in the United States is 4%, and the interest rate in France is 8%. As a result, the interest rate in the United States will:

HELP: Introduce restriction.. Get Mexico's central bank to BUY.. HURT: Get Mexico's central bank to SELL.. Raise Mexico's interest rate..

Suppose the Japanese government is concerned about the value of its currency, the peso, and decides to introduce a fixed exchange rate regime with a target above the current equilibrium rate. Classify each policy as to whether it would help or hurt Mexico's efforts to lower the exchange rate of the peso. ~ Help ~ Hurt

WORK IT OUT///////////////// a.) Appreciate

Suppose the United States and Japan are the only two trading countries in the world. What will happen to the value of the U.S. dollar if the following occur, other things equal? a.) Japan relaxes some of its import restrictions. The dollar will _____.

began to use floating exchange rates.

Within only three years after the Bretton Woods system broke down in 1971, most wealthy countries in Europe and North America:

Great Britain

_____ chose not to adopt the euro.

Sweden

_____ chose not to adopt the euro.

International transfers

_____ refers to funds sent by residents of one country to residents of another country.

~ GRAPH: (D) shifts LEFT ~ the balance of payments on the South African current account rising as the balance of payment on the financial account falls.

~ The diagram shows the market equilibrium exchange rate between the South African rand and the U.S. dollar (USD). Suppose that capital flows from the United States to South Africa decrease. Shift the demand and supply curves as appropriate. ~ This change in the exchange rate will result in

A statistical error has occurred.

At end of a given year, if a country has a current account balance of $107 billion and a financial account balance of $100 billion, what is MOST likely to be true?

END OF CHAPTER///////////////// ~ Current Account: French importer.. American in France.. American charity.. ~ Financial Account: American buys.. ~ Balance of payments rises: French importer.. American in France.. ~ Balance of payments fall: American buys.. American charity..

1.) How would the following transactions be categorized in the U.S. balance of payments accounts? Would they be entered in the current account (as a payment to or from a foreigner) or the financial account (as a sale of assets to or purchase of assets from a foreigner)? a.) A French importer buys a case of California wine for $500. b.) An American who works for a French company deposits her paycheck, drawn on a Paris bank, into her San Francisco bank. c.) An American buys a bond from a Japanese company for $10,000. d.) An American charity sends $100,000 to Africa to help local residents buy food after a harvest shortfall. ~ Current account ~ Financial account How will the balance of payments on the current and financial accounts change with each transaction? Place each transaction according to its effect on the account that it changes. ~ Balance of payments rises ~ Balance of payments falls

a.) No, the diagram does not indicate that the U.S. experienced net capital outflows. Foreign-owned assets also entered the U.S. during this time period, more than compensating for the capital outflows the U.S. experienced. b.) Yes, the diagram does indicate that national economies were more tightly linked in 2016 than they were in 1980. Since more assets in a country are held abroad, a change in the economic well-being of one country will have more pronounced effects on the economic well-being of other countries.

2.) The accompanying diagram shows foreign-owned assets in the United States and U.S.-owned assets abroad, both as a percentage of foreign GDP. As shown in the diagram, both increased around fivefold from 1980 to 2013. a.) Does the increase of U.S.-owned assets abroad as a percentage of foreign GDP mean that the United States, over the period, experienced net capital outflows? b.) Does this diagram indicate that national economies were more tightly linked in 2016 than they were in 1980?

a.) Funds will flow from the United States to Europe. The U.S. interest rate went from being above the European interest rate to being below the European interest rate. Investors will be attracted to the relatively higher returns in Europe and send more funds there. b.) The dollar's depreciation against the Euro between 2001 and 2008 is consistent with the movement of funds from the United States to Europe indicated in part a.

8.) From January 1, 2001, to June 2003, the U.S. federal funds rate decreased from 6.5% to 1%. During the same period, the marginal lending facility rate at the European Central Bank decreased from 5.75% to 3%. a.) Considering the change in interest rates over the period and using the loanable funds model, would you have expected funds to flow from the United States to Europe or from Europe to the United States over this period? b.) The accompanying diagram shows the exchange rate between the euro and the U.S. dollar from January 1, 2001, through September 2008. Is the movement of the exchange rate over the period January 2001 to June 2003 consistent with the movement in funds predicted in part a?

HURT: Raise Japan's interest rate.. Get Japan's central bank to SELL.. HELP: Introduce restrictions.. Get Japan's central bank to BUY..

Suppose the Japanese government is concerned about the value of its currency, the yen, and decides to introduce a fixed exchange rate regime with a target above the current equilibrium rate. Classify each policy as to whether it would help or hurt Japan's efforts to raise the exchange rate of the yen. ~ Help ~ Hurt