Macro 7
trade barriers put in place for many reasons including:
-general belief of some that free trade doesn't increase wealth -protect certain groups of individuals -protect national security -offset unfair competition from foreign producers
A nation's central bank can affect the foreign exchange market through all but one of the following options. Which one?
fiscal policy
foreign official assets
foreign currency, gold, & foreign government bonds that are owned by a nation's central bank
which of the following correctly defines concept of purchasing power parity?
goods & services cost same in dif. countries (after currency is exchanged)
demand for currency
group of people who want to purchase a currency being traded in a foreign currency market; for example, in the market for mexican pesos, americans who want to trade US dollars for pesos constitute the demand for pesos
supply of currency
group of people who want to sell a currency being traded in a foreign currency market; for ex: in market for mexican pesos, mexicans who want to trade pesos to americans in exchange for US dollars constitute the supply of pesos
when money leaves a country for the purchase of goods abroad:
it leaves the original country, but comes back to that country in some form
which of following transactions would be recorded as credit in US current account?
japanese consumer's purchase of computer produced in US by US firm
embargo
law that prohibits a nation's members from trading certain goods w members of another nation
current account
listing of the value of goods & services imported & exported into and out of a nation
capital account
listing of value of real assets and financial assets that are exchanged between a nation & the rest of the world
if total value of goods exported from nation is less than total value of goods imported to nation, nation is experiencing a:
merchandise trade deficit
Which of the following is not a barrier to trade?
minimum wage laws
an excess of saving over investment in a nation is necessarily reflected in:
more exports than imports (when country's domestic savings exceed its investment, country will be a lender in international capital market & will have capital account deficit, must have current account surplus which means excess of exports over imports)
what would happen to the US dollar/european euro exchange rate if europeans started buying fewer goods manufactured in the United States?
one european euro would buy more US dollars
An economy with few or no barriers to trade is called:
open economy
Absolute advantage is:
the ability to produce a good or service using fewer resources than other producers
what would happen if the british government increased the number of airplanes it buys from american aeronautics companies?
the number of dollars a british pound could buy would decrease
A country's comparative advantage in producing a good is determined by:
the opportunity cost of producing the good relative to the same opportunity cost another country pays to produce the same good
several years ago, there was a solar eclipse visible only from remote mexico. to view, many thousands of tourists went there. how would this affect cost of US dollar in terms of peso?
the price of US dollars would decrease
purchasing power parity exists between England and US if:
the price of england's currency is such that a US dollar can buy as much in england after it's changed into a british pound as it can in the US
Purchasing power parity indicates that after a currency is exchanged for another currency, you should be able to buy:
the same amount as before
capital account deficit
when total capital outflows are larger than total capital inflows, the balance on the capital account is negative. this means the nation is purchasing more foreign assets than the rest of the world is purchasing domestic assets
balance of payments is equal to:
zero
national income accounting is used to:
-determine depreciation -determine GDP -look at international exchange -determine disposable income
open economy
An economy whose members can import and export goods and services.
role of international capital movements is to:
direct one country's savings into investments in another country
Government spending and taxation policies that increase the national debt do all of the following except:
decrease trade deficit IT DOES: -crowd out private investment -increase imports -decrease exports
current account imports
total value of all goods & services imported from other nations plus the income paid to foreigners who own domestic assets
merchandise trade balance
total value of all newly produced goods exported to other nations minus the total value of all newly produced goods imported into a nation
If a trade of goods between countries occurs, what else must also occur?
trade of currency
with flexible exchange rates, trading partners usually are better off if they coordinate their monetary & fiscal policy. coordination allows: note (may have to solve by eliminating possibilities)
trading partners keep exchange rates relatively stable
True or False: If the U.S. has a current account surplus, this means the people of the U.S. are purchasing more assets from the rest of the world than the rest of the world is buying from the U.S.
true
True or False: The law of one price says that the same good should sell for the same price, regardless of where it is sold.
true
True or False: The money flowing into an economy from the rest of the world is equal to the money flowing out of the economy to the rest of the world.
true
True or False: When trading, the terms of trade will be decided somewhere between the opportunity costs faced by both trade partners.
true
international finance
study of financial topics in the context of an international setting
balance on the capital account
sum of all capital minus the sum of all capital outflows
national income accounting
system of keeping track of the flows of income in a nation for a period of one year
trade balance
term media uses to refer to merchandise trade balance
When countries specialize in the production in which they have a comparative advantage and then trade with other countries:
the well-being of the whole word increases
current account exports
total value of all goods & services exported to other nations plus the income earned from domestically owned assets in other nations
expansionary monetary & expansionary fiscal policy that creates larger federal deficit budget will have opposite effects on merchandise trade balance.
true
arbitrage
using situation in which same good has two dif. prices in dif. locations to earn a profit. in arbitrage, good is bought at low price then resold at higher prie
capital account surplus
when total capital inflows are larger than total capital outflows, the balance on the capital account is positive. this means the rest of the world is purchasing more of a nation's assets than the nation is purchasing the assets of the rest of the world
what statement is true about trade between bismark & lusitania?
workers in lusitania have comparative advantage in production of fish
protectionism
idea that international trade should be restricted to protect a nation's economic health
which of following is NOT included in capital account?
imported services
the current account represents the sum of all of exports of goods & services & income from ownership of foreign assets adjusted for:
imports of goods & services & payment of income to foreign owners of domestic assets
which of the following is the most appropriate policy to create a surplus in the capital account?
increase government spending
what would increase the number of dollars that a european euro could buy?
increase in US demand for European goods & services - by shifting demand for european euros to right, equilibrium price increases
when US central bank, the Fed, decides to decrease money supply to combat inflation, it:
increases merchandise trade deficit
balance of payments
is always equal to 0
fiscal policy:
is changes in government spending & taxation
when exports are greater than imports, the current account:
is in surplus
large surplus in capital account is accompanied by:
large deficit in current account
Arbitrage is making money by taking advantage of:
price differences
an exchange rate is:
price of one currency in terms of another currency
exchange rate
price of one unit of currency, in terms of another country's currency
what effect would solar eclipse (tourists to remote area) have on price of pesos in terms of US dollars?
price of pesos would increase
real assets
property & capital goods that may be used as factors of production
capital outflow
purchase of real or financial asset by a nation from the rest of the world
capital inflow
sale of real or a financial asset by a nation to the rest of the world
current account surplus
situation in which current account exports are larger then current account imports; the balance on the current account is positive
current account deficit
situation in which current account imports are larger then current account exports; the balance on the current account is negative
One reason the law of one price does not always hold is:
some goods transport much more easily than others
same table as above. what is opp cost in fish of producing 1 shell in lusitania?
2 fish
Worker in bismarck (shells=3, fish=1), worker in lusitania(shells=2, fish=4) what is opportunity cost in shells of producing 1 fish in bismarck?
3 shells: opp cost = production of shells by production of fish in bismarck
twin deficits effect
A situation in which a government budget deficit leads to a current account deficit.
effect of fiscal policy in open economy
Expansionary (or contractionary) fiscal policy that increases the budget deficit (or surplus) drives up (or down) interest rates and the price of the U.S. dollar. This causes the trade deficit to grow (or shrink), and creates net capital inflows (or outflows) into (or out of) the economy.
effect of monetary policy in an open economy
Expansionary (or contractionary) monetary policy drives down (or up) the interest rate and the price of the U.S. dollar. This causes the trade deficit to shrink (or grow), and creates net capital outflows (or inflows) out of (or into) the economy.
which of the following is not included in the current account?
all below ARE INCLUDED in current account: -merchandise trade balance -imported & exported services -income from ownership of assets
purchasing power parity (PPP)
The idea that one unit of a nation's currency should have the same purchasing power in another nation when it is converted into that nation's currency.
law of one price
The idea that, after accounting for transportation costs and converting between currencies, a good in one place should have the same price as the same good in a different place.
who would be hurt if US placed high tariff on sugar imported from brazil?
US sugar consumers
credit items in a nation's balance of payments correspond to:
anything that increases supply of foreign currency
which of the following would NOT be counted in US balance of payments current account?
a US company's purchase of newly constructed factory buildings in Mexico (purchases of real property, purchases of shares of stock, bonds, & other assets fall into capital account)
bretton woods agreement
agreement made between major industrial nations at close of WW2 that fixed exchange rates & pegged them to the US dollar & that created the international monetary fund (IMF) to help maintain exchange rate system
True or False: Expansionary monetary policy and expansionary fiscal policy have the same effect on an economy.
false
balance of payments
balance on current account plus the balance on the capital account; the balance of payments equal zero
prior to 1970, US part of agreement that set exchange rates between dif. countries. agreement called:
bretton woods agreement
fed can directly affect balance of one+ of following three accounts: capital account, current account, & balance of payments. which one(s)?
capital account
capital account is:
capital inflows minus capital outflows
the exchange rate is determined in the:
currency market
if country is net capital importer, capital inflows exceed capital outflows. in this case:
current account deficit (if nation is net capital importer its savings are less than its investment & there's a capital account surplus. if capital account surplus, there must be current account deficit)
balance on the current account
current account exports minus current account imports
suppose a nation has consistently run a budget deficit for many years. if the size of the government budget deficit decreases, this will decrease the merchandise trade deficit, since:
demand for loanable funds will decrease
trade barrier
device used to inhibit international trade, such as quotas, tariffs, and embargoes
expansionary monetary policy increases supply of US dollars. what effect will this have on value of US dollar in international currency exchange market?
dollars will cost less
balance of payments is a 2-side summary of a nation's
economic transaction with the rest of the world over a given period
balance of payments is:
equal to sum of current account & capital account
True or False: A nation's central bank can only affect the foreign trade of a nation by involving itself in the trade of assets between nations.
false
True or False: An exchange rate is a barrier to trade added to the cost of a currency by a nation.
false
True or False: In any exchange of currency, the exchange rate must be stated in terms of one currency (for example, dollars when discussing Japan and the U.S. or pesos when discussing Mexico and Great Britain).
false
True or False: In general, people wish to hold currency from another country.
false
True or False: The imports of one country are also the imports of that country's trade partners.
false
True or False: The law of one price does not account for transportation costs.
false
True or False: Trade restrictions make everyone better off.
false
increase in purchases of foreign assets by nation's firms would decrease that nation's capital account deficit.
false (increase in purchases of foreign assets by nation's firms the capital outflows rise - leads to bigger deficit in capital account)
if currency market begins in equilibrium & fed increases supply of US dollars as part of expansionary monetary policy, what happens to number of mexican pesos that must be given to receive $1 in exchange?
fewer pesos must be given for $1
