Econ ch 31 and 32

If the US saves $1000 billion and US NCO is -$200 billion, US domestic investment is

$1200 billion

Suppose a cup of coffee is 1.5 euros in Germany and $0.50 in the US. If purchasing-power parity holds, what is the nom exchange rate between euros and dollars?

3 euros per dollar -> 1.5 euros / $0.50 = 3

_ _ is a sudden reduction in the demand for domestic assets coupled with a sudden increase in the demand for foreign assets.

Capital flight

_ _ are the domestically generated flow of resources available for capital accumulation. The supply comes from _ _; it is _ related to the real IR. The demand for loanable funds come from _ _ and _; it is _ related to the real IR.

Loanable funds; national savings (S); positively; domestic investment (I); NCO; negatively

_ measures the imbalance of a country's imports and exports. _ is the imbalance of a country's purchase and sale of assets. These two imbalances offset each other so -> NCO=NX

NX; NCO

There is no direct way to read _ from any of the graphs, however, the quantity of NCO is always directly measurable. So, if NCO increases, there is an _ _ in NX. If NCO decreases, there is an _ _ in NX.

NX; equivalent increase; equivalent decrease

_ _ _ (also called net foreign investment) is the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners. (foreign - domestic)

Net Capitol Outflow(NCO)

S = I + NX also is interchangeable with

S = I + NCO

_ is the income of a nation that is left over after paying for consumption and government purchases.

Savings

An export subsidy should have the opposite effect of

a tarriff

The most accurate measure of the international value of the dollar is

an exchange rate index that accounts for many exchange rates.

An increase in Europe's taste for US products would cause the dollar to

appreciate, but the total value of US NX stays the same

When the dollar buys more foreign currency, there has been an _ of the dollar. When the dollar buys less foreign currency, there has been a _ of the dollar. Because there are so many currencies, the dollar exchange rate is often expressed by an _ _ _ that compares a group of currencies to the dollar.

appreciation; depreciation; exchange rate index

Other things unchanging, a higher US Real IR

decreases US NCO because US residents and foreigners prefer to invest in the US.

In the market for loanable funds, NCO is a portion of _, along with I. In the market for foreign-currency exchange, NCO is the source of _.

demand; supply

In the market for foreign-currency exchange, NCO represents the quantity of _ _ to buy net _ _. NX represents the quantity of _ _ for the purpose of buying US _.

dollars supplied; foreign assets; dollars demanded; NX

Capital flight reduces _ _, shifting the _ for loanable funds to the left.

domestic investment; left

In an open economy, when the US saves a dollar, it can invest in _ capital (I) or _ capital (NCO). - investing in foreign assets: - foreigners help finance a country's investment:

domestic; foreign; S>I, NCO>0; I>S, NCO<0

_ are domestically produced goods and services sold abroad while _ are foreign-produced goods and services sold domestically.

exports; imports

When a domestic resident buys and controls capital in a foreign country, it is known as _ _ _. When a domestic resident buys stock in a foreign corporation but has no direct control of the company, it is known as _ _ _.

foreign direct investment; foreign portfolio investment

The nominal exchange rate is the ratio of _ _ _ to the _ _ _. If a central bank creates more money, its currency will buy _ goods and services and _ units of other currencies - _.

foreign price level; domestic price level; fewer; fewer; depreciate

An open economy interacts with other economies in two ways: it buys and sells _ _ _ in world product markets, and it buys and sells _ _ in world financial markets.

goods and services; capital assets

When someone exports goods and receives foreign currency, the foreign currency will either be _, used to buy _ or _ from the importing country. In each case, NX = NCO. So, if a country runs a trade deficit (NX<0), then it must finance this by _ _ _ (NCO<0).

held; goods; assets; selling assets abroad

An increases in US private saving

increases US NX and US NCO the same amount

Capital Flight

increases a country's NX and decreases its long-run growth path.

An increase in the government budget deficit

increases the real IR and crowds out investment.

When Ford sells a car to Mexico, Ford receives pesos. NX and NCO _. (1) If Ford holds the pesos, _ increases b/c Ford is now holding additional foreign assets. (2) If Ford uses the pesos to buy other Mexican stuff, NX and NCO _ _. (3) If Ford uses the pesos to purchase Mexican goods of = value, NX and NCO _ _ _. (4) If Ford exchanges pesos->$, could (a) buy Mexican assets, NX and NCO _ _ or (b) buy Mexican goods, NX and NCO _ _ _.

increases; (1) NCO; (2) maintain increases; (3) return to original; (4) maintain increases; return to original

Purchasing-power parity is most likely to hold in the _ _. However, it is still not completely accurate because (1) some goods are not easily traded and (2) even tradable goods are not always _ _.

long run; perfect substitutes

If NCO is negative, it means that foreigners invest _ in the US than Americans invest abroad.

more

When Real ER rises, US goods are _ _ relative to foreign goods and NX _. When Real ER falls, US goods are _ relative to foreign goods and NX _.

more expensive; fall; cheaper; rise

The quantity of NCO is _ related to the real IR because when the US real IR is high, US assets are more attractive and US NCO is low.

negatively

The demand for dollars is _ related to the real ER because a rise in the real ER means that US goods are more expensive and less attractive to foreign and domestic buyers, causing _ to fall. The supply of dollars is _ because NCO does not depend on the real ER, but instead on the real IR.

negatively; NX; vertical

_ _ are the value of a country's exports minus the value of it's imports. ( exports - imports)

net exports (NX)

A country's trade policy has _ _ on the size of it's trade balance.

no impact

If purchasing-power parity is true, the _ exchange rate between two countries' currencies depends on the price levels in those two countries. equation: P= US price level, P* = foreign price level, e = exchange rate in terms of foreign currency per dollar

nominal 1/P = e*/P or e = P*/P

The _ _ _ is the rate at which people can trade one currency for another currency. We will always express exchange rates as _ _ _ _.

nominal exchange rate; foreign currency per dollar

Suppose the money supply in Mexico grows more quickly than the money supply in the US. We would expect that the

peso should depreciate relative to the dollar.

Trade Surplus: NX are _, domestic _ is greater than domestic _; and NCO is _. Trade Deficit: NX are _, domestic saving is _ than domestic investment; NCO is _. - country is financing by selling assets abroad Balanced Trade: NX are _, domestic saving is _ to domestic investment, NCO is _.

positive; saving; investment; positive negative; less; negative zero; equal; zero

A change in national saving generates the same result, regardless of whether the change was from _ _ or _ _. A budget deficit causes a reduction in the public saving and shifts the supply of _ _ to the _.

private saving; public saving; loanable funds; left

The _ _ _ is a theory that says that a unit of any given currency should buy the same quantity of goods in all countries. The logic of this theory is based on the _ _ _ _ - a good must sell for the same price in all locations, if not, people buy the good where it is cheap and sell where it is expensive. This behavior will drive up P where it was low, and drive down P where it was high until P are _. This process is called _.

purchasing-power parity; law of one price; equalized; arbitrage

The _ _ _ is the true relative cost of goods across borers.

real exchange rate

The _ _ _ is the rate at which people can trade the goods and services of one country for the goods and services of another. equation: ?

real exchange rate; Real ER = (nom ER x dom price) / foreign price

If the US imposes a quota on the importing of Chinese goods,

the demand for dollars increases and the dollar appreciates - NX remains unchanged

If the exchange rate changes from 3 Brazilian reals per dollar to 4 reals per dollar,

the dollar has appreciated.

NX are also called the _ _. If exports > imports, NX are _ and the country is said to have a _ _. If imports > exports, NX are _ and the country is said to have a _ _.

trade balance; positive; trade surplus; negative; trade deficit

A _ _ is a government policy that directly affects the quantity of a country's imports or exports. A _ is a tax on imported goods. An _ _ is a limit on the quantity o f a good which is produced abroad that can be sold domestically.

trade policy; tariff; import quota

the government budget deficit and the trade deficit

twin deficits