270 exam 3

Suppose that you​ buy, and one year later​ sell, a foreign​ (British) bond under the following​ circumstances: When you buy the bond the exchange rate is ​$2.00 = £1. You pay £45​ ($90) for the British bond. You sell the bond for £50. No interest payment was expected or received. When you sell the​ bond, the exchange rate is ​$1.50 = £1. What is your gain or loss in​ dollars?

$-15

We have the following data for a hypothetical open​ economy: GNP​ = ​$9,000 Consumption​ (C) = ​$7,200 Investment​ (I) = ​$1,400 Government Purchases​ (G) = ​$1,200 What is the value of the current account​ balance?

$-800

We have the following data for a hypothetical open​ economy: GNP​ = ​$12,000 Consumption​ (C) = ​$8,200 Investment​ (I) = ​$800 Government Purchases​ (G) = ​$1,600 What is the value of the current account​ balance?

$1400

We have the following data for a hypothetical open​ economy: GNP​ = ​$10,000 Consumption​ (C) = ​$7,800 Investment​ (I) = ​$1,200 Government Purchases​ (G) = ​$1,600 Tax Collections​ (T) = ​$1400 What is the value of private savings plus public​ savings? What is the value of the current account balance​ CA?

$2000 $-600

Consider the following hypothetical data for an open economy​ (in millions): Assets owned inside the U.S. by U.S. citizens​ = ​$150,000 Assets owned outside the U.S. by U.S. citizens​ = ​$22,786 Assets owned outside the U.S. by foreign citizens​ = ​$108,000 Assets owned inside the U.S. by foreign citizens​ = ​$20,315 The value of the International Investment Position​ (IIP) of the U.S. is

$2471

Membership in the EU

*Deepening* - increasing the degree of integration - Moving from an F T A to a customs union to a common market to an economic union. - Includes exchange rate coordination before the single currency was adopted *Widening*: - adding new members - Growing from 6 members to 27 in separate waves. - Political events, such as the collapse of the Soviet Union and the fall of the Berlin Wall played essential roles

Primary & secondary income

*Primary*: income received from abroad/income paid abroad - Investment earnings received (credit) and paid (debit) - Wages & salaries received from abroad (credit) or paid abroad (debit) *Secondary*: transfers made abroad/transfers received from abroad - Remittances: the part of wages/other income that individuals transfer to families and friends living outside the country

flexible vs. fixed exchange rate systems

- *flexible*: values change day to day, even minute by minute ~ Flexible exchange rate systems let the home currency change in value relative to other currencies. - *Fixed*: The value of their currency is fixed to the dollar, the euro, the pound, or another currency, or even a basket of currencies, and does not move in value

SMP (Single Market Program):

- 279 steps toward the creation of a common market - Based on four freedoms: freedom of movement of goods/services (outputs) and capital/labor (inputs) - Fell into elimination of physical barriers, technical barriers, and fiscal barriers - Gains were increased competition & economies of scale

Russia imports 5 billion Rubles of goods and exports 7 billion rubles of goods. At the same​ time, Russia imports 4 billion rubles of​ services, and Russia makes a 2 billion Ruble net unilateral transfer to Albania.​ Russia's current account equals

- 4 billion rubles

treaty of rome

- 6 founding members created treaty of Rome, creating a FTA and the EEC - A central topic for debate and negotiation - Centralization vs. Autonomy = subsidiarity

Expenditures in the EU budget are derived from:

- Agricultural support and rural development, about 37 percent; - Cohesion funds to support economic development, about 50 percent of the budget.

ERM (Exchange Rate Mechanism)

- At the center of the E M S was the European currency unit (E C U ): a weighted average of the value of the member's currencies. - Each member fixed their currency to the E C U; they could let it float up or down, but only within a few percentage points before they had to intervene to pull it back.

3 conditions that must be met in order for a single currency to be better than multiple currencies:

- Business cycles must be synchronized; - Labor and capital must be mobile between countries; - There must be policies for addressing regional differences in growth when the business cycles do not match

Debt can be unsustainable when:

- Debt service increases faster than G D P; - Debt is denominated in a foreign currency and the borrowing country has a significant decline in the value of its own currency; - A borrowing country depends on exports of 1 or 2 commodities that have falling prices in the world market.

fixed ER in relation to gold standard

- Fixed exchange rates are similar to gold standards but instead of pegging the home currency to gold, it is pegged to another currency or to a basket of currencies. - The monetary authority must be willing and able to convert the national currency into the currency it pegs to, at the official rate of exchange.

GNP equations

- GNP = GDP + net income receipts (net primary income + net secondary income) - GNP = C + I + G + CA (CA = NX + net income receipts) - GNP = C + T + S (T=taxes)(S=savings) - GNP (C + T + S) = C + I + G + CA - S + (T - G) = I + CA [(T-G) = budget balance = government savings] S = private savings I = domestic investment (not stocks/bonds) CA = foreign lending and borrowing S + (T-G) = total savings S = I + CA + (T-G)

Which of the following are recorded as​ credits, in the current​ account?

- Income received from foreign investments. - Transfers received. - Exports. - *All of the above*

Burden of external debt depends on:

- Its size relative to GDP; - Whether denominated in home or foreign country currency; - The size of the current account deficit and the need for continued capital inflows.

Current Account (CA)

- Primarily tracks the flow of goods/services between a country and the rest of the world - 3 separate components - CA = EX - IM + net income receipts ~ NX = Net Exports = EX - IM - Deficit: CA < 0 → FA > 0 : borrowing internationally, must be financed (consuming > producing) - Surplus: CA > 0 → FA < 0: lending internationally, savings that can me invested abroad (producing > consuming)

Actors in foreign exchange markets

- Retail customers: Firms and individuals hold foreign currency to buy goods and services, to travel, to adjust their portfolios, and to speculate. - Commercial banks hold currencies as part of their services for their customers; they are the largest participant in currency markets. - Foreign exchange brokers are middlemen between banks and buyers and sellers of foreign exchange. - Central banks hold foreign exchange as reserves and to supply domestic banks that need it.

Which of the following is correct when comparing the European Union with the NAFTA​ region?

- The EU has a larger population than the NAFTA​ region - NAFTA region is larger in terms of total GDP - Each nation in NAFTA is allowed to set its own external trade and economic policy while EU countries are subject to the EU agreements - some EU countries use a single currency while NAFTA countries do not.

The balance of payments accounts

1. Current Account (CA) 2. Financial Account (FA) 3. Capital Account (KA)

After the breakdown of the Bretton Woods​ system, the dominant exchange rate regime in the U.S. was

a managed float.

Which of the following would be interested in holding foreign currency to take advantage of investment​ opportunities?

a portfolio manager

Which of the following would be interested in holding foreign currency to engage in​ transactions?

a tourist, a manufacturing firm

Appreciation/Depreciation

appreciation: a currency becomes more valuable - foreign currency costs less depreciation: a currency becomes less valuable - foreign currency costs more Do not tell is strength of currency, just value

EMS (European Monetary System)

made ER fixed to eachother

The Single European​ Act, which was implemented in​ 1993, included

measures to ensure the free movement of​ goods, services,​ capital, and labor.

Reserve assets

monetary gold and foreign currency that can be used to settle international payments - all countries hold reserves as an emergency fund for making payments

GNP​ (Gross National​ Product) equals GDP plus

net receipts of factor income from the rest of the world and net unilateral transfers.

case study of the Schengen agreement

o Eliminates passport controls as part of the move to a common market and the four freedoms o Ireland (and the U K when it was in the E U) did not accept the agreement; o Tensions have arisen with the entrance of Central European countries such as Poland, Bulgaria, Romania, etc. o Tensions are further heightened by the refugee crisis in the Middle East. o Once a person gains admission to an Schengen country, they can move relatively freely around the E U. o This has created a political crisis in the E U.

interest rate arbitrage

when they borrow in markets with low interest rates and lend in markets with high ones

The use of a single currency forces member countries to use a single monetary policy. The presence of a one size fits all policy is the most problematic when

workers do not migrate easily between member countries.

Your country has a positive International Investment Position​ (IIP) with another country. This statement means

your​ country's citizens own more assets in the other country than the other​ country's citizens own in your country.

Gross National Product represents the sum of the following expenditure​ categories:

​consumption, investment, government​ purchases, and the current account balance.

Case study of financial crisis

- The banking and financial crisis that began in the U.S. spread to Europe where many banks and other financial firms had purchased U.S. assets that suddenly lost value. - As government revenue fell and expenditures increased, the banking crisis became a debt crisis in several countries. - The European Central Bank was created with a "no-bailout clause" which prohibits it from acting as a lender of last resort to indebted governments. - Fears that some countries would be forced out of the euro led to rapidly rising interest rates for countries with large debts. - The crisis in the E U was worse than in the U.S. partly because the former is not a fiscal union and the latter is.

In what order did the three main stages of deepening occur in the European Community after the passage of the Treaty of​ Rome?

- The creation of the European Monetary​ System - the passage of the Single European​ Act - the passage of the Treaty on European Union​ (Maastricht Treaty).

Volatility/Sudden Stop

- Volatility: how easy/hard it is for the flow to reverse - Volatile inflows can increase risk: it is easier for them to become outflows. This puts a variety of pressures on the country experiencing sudden, large outflows or a sudden stop in capital flows

Revenue in the EU budget is derived from:

- a payment from each country (the largest source of revenue); - Tariffs on goods entering the E U; - An EU share of national value added taxes (VAT).

Subsidiarity

- centralization vs. autonomy - Subsidiarity principle leaves to individual nations the policies that do not have a strong international dimension and centralizes those that do

Establishment of the EU

- economic union of 27 nations - founded in 1957 as an FTA called the European Economic Community (EEC) - EU market comparable to the US + Canada + Mexico

Identify the following as debit or credit entries in the Balance of​ Payments: - exports of goods and​ services: - An incurrence of liabilities to​ foreigners: - Primary and secondary income payments​: - An increase in official Reserve​ Assets: - An acquisition of foreign financial​ assets:

- exports of goods and​ services: Credit/Current Account - An incurrence of liabilities to​ foreigners: Credit / Financial Account - Primary and secondary income payments​: Debit/ Current Account - An increase in official Reserve​ Assets: Debit / Financial Account - An acquisition of foreign financial​ assets: Debit/ Financial Account

Financial Crisis (2007-2009) case study

- financial crisis began in 2007, and intensified in 2008 when the large US investment bank Lehman Brothers collapsed - As the crisis developed, financial interests in the U.S. reassessed their portfolios in order to reduce their risks 1. Sold foreign assets 2. Increased their reserves of highly liquid, low risk, dollar dominated assets 3. Less change in FDI, most of the change was in portfolio and other assets - Financial and other firms abroad wanted to reduce their exposure to U.S. assets and needed to accumulate highly liquid, safe assets denominated in their own currencies. 1. Cut down acquisition of US assets 2. FDI barely changed 3. Portfolio investment fell

S = I + CA + (T-G)

- says that private savings + public savings = domestic investment + foreign investment - Private savings (S) can be used to: 1. Finance domestic investment (I) 2. Finance domestic budget deficit (G-T) 3. Lend to foreigners (CA)

The Interest parity condition

- short run of exchange rate determination - Interest parity holds that exchange rate movements should be sufficient to counteract any differences in interest rates between countries. - Speculation is the buying and selling of assets in anticipation of a change in value. - The interest parity condition can be estimated from today's interest rates and the exchange rate in the spot and forward markets.

Financial Account (FA)

- the record of all financial transactions between a country and the rest of the world - internal transactions that involve financial assets - net acquisition of assets - net incurrence of liabilities - FDI & FPI - Reserve assets

reasons for holding foreign currencies

- to buy foreign financial assets (12%) - to buy goods and services; trade (3%) - to speculate; buy currencies that you think will increase in value to profit (85%)

Which of the following is not part of the definition for Gross National​ Product?

...produced within a​ country's borders...

Suppose the​ dollar-yen exchange rate is 0.015 dollars per yen. Since the base​ year, inflation has been 4 percent in Japan and 10 percent in the United States. What is the real exchange​ rate? In real​ terms, the dollar has appreciated against the yen.

.0142 true

Suppose the U.S.​ dollar-euro exchange rate is 1.3 dollars per​ euro, and the U.S.​ dollar-Mexican peso rate is 0.2 dollars per peso. What is the​ euro-peso rate? ________euros per Mexican peso.

0.154

ER determination

1. Long Run: PPP 2. Medium Run: Business cycle - Impacts via exports and imports 3. Short Run: Interest parity & speculation look @ chart on study guide

Fundamentals of BOP

1. Three accounts 2. Double-Entry Bookkeeping: every transaction enters the BOP twice - Once as a credit entry, and once as a debit entry 3. BOP always balances: CA + FA + KA = 0 4. All transactions are recorded in terms of a country's national currency 5(1). Credit entry involves sending something abroad and expecting a payment for it (generates a money-in effect) - Export of goods & services in CA - Sale of financial assets abroad is a credit entry in FA 5(2): Debit entry involves sending money abroad, or borrowing something for which we are expected to pay (creates money-out effect) - Imports of goods/services is a debit in CA - Purchase of foreign financial assets is a debit entry in FA

3 separate components of CA

1. Trade Balance (largest component, record of exports and imports of goods and services) 2. Primary Income (income received from abroad - income paid abroad) 3. Secondary Income (· transfers made abroad - transfers received from abroad)

Suppose a bond issued by the European Central Bank and denominated in euros pays 6​% per year. Today the exchange rate is 1.72 dollars per euro. It is expected that the exchange rate in one year will be 1.89 dollars per euro. What is the annual dollar return on this​ bond?

16%

A European washing machine costs 1000 Euros. A U.S. washing machine costs 1000 dollars. If the nominal exchange rate is​ $0.50 per Euro the real exchange rate is

2 European washing machines per U.S. washing machine.

If the U.K. exports 14 billion British Pounds of​ products, and imports 10 billion British pounds of​ products, its trade balance equals

4 billion british pounds

If the interest rate on a deposit in Euros is​ 6% per​ year, and the Euro is expected to depreciate against the U.S. dollar by​ 1%, what does the interest parity condition imply about the interest rate on the deposit in U.S.​ dollars?

5%

Which of the following is not a positive of having a large trade​ deficit?

A large trade deficit accumulates foreign debt that must be serviced in the future.

Which of the following is a con of multiple nations having a single​ currency?

A single currency may cause the loss of an independent monetary policy and the sovereign control of a​ country's money supply.

Which of the following is an example of widening of economic​ integration?

Admitting more members to the union.

If the U.S. dollar depreciates in terms of the​ Euro:

American goods would be cheaper for Europeans.

A managed floating exchange rate refers​ to:

An exchange rate that is not​ pegged, but does not float freely.

Which of the following were motivating factors in the 1990s drive to start a monetary union in the​ EU?

Eliminate currency conversion costs Avoid the effects of exchange rate uncertainty on trade and investment

Benefits/Costs of single currency

Benefits - Reduced cost of currency conversion: 0.4 % of G D P saved. - Reduce exchange rate uncertainty, causing more trade and investment. Costs - Loss of monetary policy. - Cannot use flexible exchange rate as buffer against external shocks. - Loss of monetary policy is compounded by limits on deficits (loss of fiscal policy) and the absence of a mechanism to transfer resources to countries in recession.

Benefits/cost of a single currency

Benefits - Reduced transaction costs in currency conversions and accounting. - Data on increased trade and investment is mixed. Cost - The largest potential cost of a single currency is that countries sharing a currency give up their independent monetary policies.

Private savings & government savings

Private savings = Y-T-C Government savings = T-G

The EU budget

Equals less than 1% of EU GDP

Fixed ER systems

Fixed ER come in various forms: - Some countries adopt a foreign currency as their own. - Some peg to a foreign currency and keep it fixed. - Some peg to a basket of foreign currencies. - Some peg to a foreign currency and adjust it periodically. This is called a crawling peg. - Some peg to another currency, but let it float up or down by some percentage before they intervene

Alternatives to flexible exchange rates

Fixed exchange rates, also called pegged exchange rates come in a variety of formats. - Hard pegs are not allowed to change in value at all. - Soft pegs are allowed to change within some limit, but not beyond that limit.

Which of the following is NOT a valid argument against a floating exchange rate​ regime?

Floating rates put some countries in a privileged position.

How does a fall in the value of the pound sterling as shown in the diagram to the right affect British​ consumers?

Foreign goods are now relatively more expensive. British consumers are hurt.

Which of the following is NOT an account in the balance of​ payments?

Future account

How can CA deficits be harmful & how can they be sign of economic strength

Harmful: - If a country is dependent on volatile foreign capital inflows to finance them; - If there is a sudden stop in foreign financing that forces large cuts in spending and consumption. - If they undermine confidence in the country and its currency. - If countries incur liabilities that must be paid back in a foreign currency Strength - If they are caused by large inflows of foreign capital, looking for a place to invest; - If they are caused by a rise in imports when an economy experiences rapid economic growth.

In a fixed exchange rate​ system, how do countries address the problem of currency market pressures that threaten to lower or raise the value of their​ currency?

If demand​ rises, countries must fill the excess demand for foreign currency by selling their reserves. & If demand​ falls, then countries must increase demand by buying up the excess supply with domestic currency.

Under the Bretton Woods​ system, the increase in the U.S. inflation rate would lead​ to:

Inflation in the countries that pegged their currencies to the U.S. dollar.

Which of the following represents direct foreign​ investment?

Intel moves part of its production to a plant in Malaysia.

Which characteristic about the EU is not​ correct?

It has​ inter-mixed its separate cultures.

What does the European​ Union's Common Agricultural Policy​ do?

It supports farm prices via subsidies. It promotes rural development in the EU countries.

Suppose that U.S. interest rates are 4 percent more than rates in the European Union. Would you expect the dollar to appreciate or depreciate against the​ euro, and by how​ much? Suppose that U.S. interest rates are 4 percent more than rates in the European Union. If the forward and spot rates are the​ same, which direction would you expect financial capital to​ flow?

It would be expected that the dollar would depreciate by 4 percent. Capital would flow to the United​ States, decreasing the demand for foreign currency and increasing the supply of foreign currency.

Foreign Exchange Supply and Demand

LOOK @ NOTES - Increases in supply lower the price, decreases raise the price. - Increases in demand raise the price, decreases lower the price. - The graph of supply and demand has price on the vertical axis, quantity on the horizontal. - Price is the exchange rate: units of domestic currency per unit of foreign. - Quantity is the quantity of foreign exchange.

Demand & supply on foreign exchange graph

LOOK AT NOTES - Demand slopes down to the right: as foreign exchange is cheaper, more is demanded, all else equal. - Supply slopes up to right: as foreign exchange is more expensive (domestic currency cheaper), foreigners are willing to supply more. - Demand changes are related to anything that might cause an increase in the demand for British pounds by U.S. residents (Trading, travel, investing, speculating) - Supply changes are related to anything that might cause an increase in the supply of British pounds to the U.S. (Trading, travel, investing, speculating)

International Debt

Net capital inflows are an increase in liabilities to foreign nations. - The inflows can take several forms: F D I, portfolio investment, bank loans and others. - Some forms represent an increase in debt by the home country to foreigners. - External debt creates debt service obligations.

The Maastricht Treaty

Officially creates an economic union - Establishes a common currency (the euro) under the new European Central Bank (ECB) - Convergence criteria: set of monetary & fiscal targets (Goal to ensure that each member's policies are balanced and under control)

Which equation correctly shows how budget deficits of a country are linked to its current account​ balance? It is not possible for government deficits to decline while increasing the current account deficit because economic variables have to be in equilibrium.

Private Savings​ + Government Savings​ = Investment​ + Current Account false

PPP ER

Purchasing Power Parity (PPP): The exchange rate allows the same quantity of goods to be bought in either currency when converted from one to another. - PPP exchange rate depends on goods arbitrage - If regular ER$ > ER $ PPP: $ overvalued - If regular ER$ < ER $ PPP: $ undervalued

Which of the following is not a directive in the implementation of the Single Market​ Program?

Reduce income differences between member countries. Establish policy to prevent mergers that increase market power. Eliminate immigration and customs controls.

Which of the following is not a gain from trade the European Union expected to create with the implementation of the Single European​ Act?

The European Union expected that a single currency would reduce printing and minting costs of money.

Case study on US CA deficit

The United States current account experienced large deficits in the 1980s and from the early 1990s forward (Figure 9.1) - The deficits look similar but movements in private savings, the budget deficit, and investment are different. - Early deficit of the 1980s was driven by low private savings and high budget deficits. - Later deficit of the 1990s was during a period of falling budget deficits, but falling savings and rising investment. - During 200s CA deficit increased (2001-2006), but in 2007 the CA deficits began to shrink

Which of the following is NOT a benefit of a single​ currency?

The central bank can stabilize economic fluctuations across countries.

Under a Gold​ Standard:

The exchange rate is fixed.

A contract that contains a promise that a specified amount of foreign currency will be delivered on the specified date in the future is traded in which of the​ following?

The forward market.

In the debate on fixed versus floating exchange​ rates, the strongest argument for a floating rate is that it frees macroeconomic policy from taking care of the exchange rate. Why is this also the weakest​ argument?

The freeing of monetary policy from the task of maintaining an exchange rate creates a lack of external discipline on monetary policy and leads to an over reliance on inflationary policies to satisfy domestic economic needs.

forward market

The market for the buying and selling of currencies for future delivery. - Businesses needing foreign currency or receiving foreign currency payments can sign a contract that guarantees a set price either 30, 60, 90, or 180 days in the future.

Spot market

The market for the buying and selling of currencies in the present

GDP

The market value of all final goods and services produced inside a country's borders over a period of time, usually one year *GDP = C + I + G + NX* - C: consumption - I: Investment - G: government - CA: current account - NX: net exports

Forward ER

The price of a currency that will be delivered in the future.

The Single European Act is a case in which it was difficult to create an agreement in spite of the fact that there was near unanimity in support for an agreement. If everyone wanted the​ agreement, why was it hard to​ negotiate?

The problem with public procurement as some nations were unwilling or incapable of opening government purchases to​ non-national firms. There were differing national standards for​ products, safety​ codes, industrial​ processes, and skill certification. The variation in​ value-added taxes between the​ high-tax countries and the​ low-tax ones.

What does the Real ER show

The real exchange rate shows whether a currency is depreciating or appreciating in its purchasing power over foreign goods and services. - Nominal appreciation or depreciation is not always the same as real. - Businesses and households that use foreign exchange are more concerned about the real value of their currency than the nominal.

In an open economy holding GNP and consumption spending constant and where private savings equals domestic​ investment, a government budget deficit must be matched​ by:

a current account deficit

Hedging

When investors and speculators use the forward market to protect against unanticipated currency fluctuations - They can buy a forward contract to sell foreign currency at the same time that their foreign assets will be sold. - When they hedge against currency fluctuations, they are engaging in covered interest arbitrage.

FDI (Foreign Direct Investment)

establish a business in another country, buying real estate (more preferred because least volatile) - Investment in real assets (not paper assets)

__________________ must choose an exchange rate system to determine how prices in the home country currency are converted into prices in another​ country's currency.

every country

Debt that is money owed to​ non-residents and must be paid in foreign currency is known as

external debt.

Net incurrence of liabilities

foreign purchase of home country's assets - exporting foreign FA - positive = debit

The current day European Union

has GDP and population that are similar in size to the GDP and population of countries comprising NAFTA.

The U.S. dollar is overvalued and the peso is undervalued

if a visitor to Mexico from the United States can buy more goods in Mexico than he can buy in the United States when he converts dollars to pesos.

If a country has no public or private​ savings, it is only possible for the county to have positive investment

if the country runs a current account deficit to finance the investment.

A single​ currency, such as the Euro in the​ E.U., is appropriate when countries are seeking to

integrate with each​ other, with the intention of going further than simply implementing free trade in goods.

The principle of subsidiarity in the EU is used to decide which policies are the authority of national governments or of EU institutions. Subsidiarity

is based on the principle that the EU only has authority to tackle issues that are more effectively handled through international action than by individual nations acting alone.

GNP

is the market value of all final goods and services produced by the country's labor, capital, and resources, during a year - look at study guide GNP = GDP + net income receipts (net primary income + net secondary income)

External Debt

is​ ubiquitous, or omnipresent—all countries have it.

Case Study: Brexit

o In June, 2016, the United Kingdom voted to leave the E U. o They were officially out of the E U after January 31, 2020, but continued to follow E U rules and regulations while they negotiated the terms of leaving. At the end of 2020, the transition was over. o Key issues include: o Northern Ireland: How hard a barrier between the Republic of Ireland and Northern Ireland? Will it threaten the peace? o Fisheries (allow E U access to U K waters?) o F T A or customs union with E U? An F T A requires the U K to follow EU product standards and rules governing subsidies for industry. These are reasons why they left. o Will Brexit provoke a migration of businesses to the E U or elsewhere if the U K loses its free trade with the EU?

Current European Union institutions are financed by

payments by member countries and a share of tariff revenue collections.

ER

price of one currency in terms of another - = rate @ which we can exchange two currencies - look @ exchange rate sheet in notes for calculations

FPI (Foreign Portfolio Investment)

purchasing foreign stocks and bonds (paper assets) - FDI > FPI for receiving country, leads to: job creation, knowledge spill overs, tech = long term growth - FPI can destabilize economy if it leaves country abruptly (Asian financial crisis of 1977)

Optimum currency area (single currency area)

region that adopts a single currency best example is the Euro

Capital Account (KA)

smallest of the three accounts and records transfers of specialized capital assets between countries - GDP - GNP

In​ general, a country whose economy is dependent on an imported resource and whose goal is to minimize the shock that the resource can cause to their economy should adopt an exchange rate system

that allows their currency to float in the market.

In​ 2001, the Euro cost just about 90 cents. In​ 2008, the cost of the Euro was almost​ $1.50. This general development means that between 2001 and 2008

the Euro appreciated against the U.S. dollar.

In which market will a company arrange to receive currency for a transaction at a future​ date?

the forward market

Real ER

the nominal rate adjusted for price differences at home and abroad. Define the following: · Rr = the real exchange rate; · Rn = the nominal exchange rate; · P* = foreign price level · P = domestic price level. - The real exchange rate: · Rr = Rn(P*/P).

The market ER / Nominal ER

the price of a unit of foreign currency. § It does not tell the value of the goods and services that can be purchased. § The value of the goods and services depends on foreign prices.

Net acquisition of assets

the purchase of foreign financial assets - importing foreign FA - positive = credit

The current account will increase if

the real exchange rate depreciates or disposable income goes

In 2004 and 2007 the EU extended membership to a number of countries in Central and Eastern Europe. The preconditions for entry by these new members did NOT include

the requirement that the countries have​ stable, functioning democracies. the requirement that the new members adopt​ EU-wide rules regulating such areas as technical​ standards, banking supervision and statistical reporting requirements. the presence of a​ market-based economy

Gold standard

the value of currency is set to a quantity of gold. Rules: - Fix the currency to a given quantity of gold; e.g., $35 per ounce; - Keep a fixed ratio of domestic money to gold; - Be willing and able to convert domestic money to gold, and vice versa. Under the gold standard: - The money supply is determined by the quantity of gold; - Countries cannot use monetary policy; the money supply is fixed to the quantity of gold. - Central banks or monetary authorities must be willing and able to supply gold when the demand increases.'