ECON 101: Chapter 18

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e= formula

P*/P

If you go to the bank and notice that a dollar buys more Japanese yen than it used to, then the dollar has...

appreciated. other things the same, the appreciation would make Americans more likely to travel to Japan

if one country's currency appreciate the other country's currency must...

depreciate

If the US real exchange rate appreciates, US exports to Europe,

fall and the European exports to the US rise

P*=

foreign price in foreign currency

A depreciation of the US real exchange rate induces US consumers to buy...

more domestic goods and fewer foreign goods

NCO measures the imbalance in a country's trade in assets: what happens when NCO<0

"capital inflow"; foreign purchases of domestic assets exceed domestic purchases of foreign assets (Dubai buys more US stuff than US buys theirs)

A Ford Escape SUV sells for $24,000 in the US and 720,000 rubles in Russia. If purchasing power parity holds, what is the nominal exchange rate (rubles per dollar)?

30 rubles per dollar

Which of the following statements about a country with a trade deficit is not true?

C!!! A. exports<imports B. Net capital outflow<0 C. investment<saving D. Y<C+I+G

Y-C-G=

I+NX

S=

I+NX sinse S=Y-C-G; and S=I+NCO

what is the accounting identity and how does it arise?

NCO=NX=S-I; every transaction that affect NX also affect NCO by same amount; every international transaction involves the exchange of an asset for a good or service; this is because extra money sent to foreign countries must be spent somewhere and in this case it is spent to purchase assets in other countries

what happens when currency appreciates to exports, imports, GDP, and NX?

decrease, increase, decrease, decrease

when a Mexican citizen goes to the bank to make the exchange they _______ dollars and _______ pesos

demand; supply

closed economy

does not interact with other economies in the world

P=

domestic price

foreign direct investment

domestic residents actively manage the foreign investment (ex: mcdonald opens outlet in Moscow)

foreign portfolio investment

domestic residents purchase foreign stocks or bonds supplying "loanable funds" to a foreign firm

trade surplus

excess in exports of imports; X>M; NX>0; increases GDP

what happens when S>I?

excess loanable funds flow abroad in the form of positive net capital outflow

trade deficit

excess of imports over exports; X<M; NX<0; decreases GDP

balanced trade

exports = imports

nominal exchange rate

rate at which one country's currency trades for another, relative price of the currency of two countries

If you are vacationing in France and the dollar depreciates relative to the euro, then...

the dollar buys fewer euros. it will take more dollars to buy a good that cost 50 euros

when do national savings decrease?

when excess loanable funds flow abroad in the form of positive NCO

NCO measures the imbalance in a country's trade in assets: what happens when NCO>0

"capital outflow"; domestic purchases of foreign assets exceed foreign purchases of domestic assets (US buys more Dubai stuff than Dubai buys ours)

If a country has a trade surplus of $50 billion and then its exports rose by $30 billion and its imports rose by $20 billion, its net exports would now be?

$60 billion

If the dollar buys fewer bananas in Guatemala than in Honduras, then traders could make a profit by...

Buying bananas in Honduras and selling them in Guatemala, which would tend to raise the price of bananas in Honduras

What do you think would happen to US net exports if Price of goods produced in Mexico rise faster than the prices of goods produced in the US

US NX increase

what happens when a foreigner purchases a good from the US

US exports and NX increases; foreigner pays with currency/assets, so the US acquires some foreign assets, causing NCO to rise

what happens when a US citizen buys foreign goods?

US imports rise and NX falls; the US buyer pays with US dollars or assets so the other country acquires US assets causing US NCO to fall

What do you think would happen to US net exports if Canada experiences a recession (falling incomes, rising unemployment)

US net exports would fall due to a fall in Canadian consumers' purchases of US exports

What do you think would happen to US net exports if US consumers decide to be patriotic and buy more products "Made in the USA"

US net exports would rise due to a fall in imports

If Chileans buy more US stocks and bonds and US residents buy more Chilean wine, then....

both US NX and US NCO outflow fall

depreciation "weakening"

decrease in the value of currency as measured by the amount of foreign currency it can buy

countries with high inflation rates should have...

depreciating currencies

Suppose more Mexican citizens want to purchase American goods. This increases the demand for -__________ and the supply of ________.

dollars; pesos

An Italian company builds and operates a pasta factory in the US. This is an example of Italian...

foreign direct investment that increases Italian NCO

what happens when S<I?

foreigners are financing some of the country's investment, and NCO<0

imports

goods and services produced abroad and sold domestically

exports

goods and services produced domestically and sold abroad

arbitrage

if a good sells for different prices in 2 different places then you can make a quick profit by buying at low price and selling at high price, eventually makes prices equal

appreciation "strengthening"

increase in the value of currency as measured by the amount of foreign currency it can buy

what happens when currency depreciates to exports, imports, GDP, and NX?

increase, decrease, increase, increase

open economy

interacts freely with other economies around the world

what happens when a country runs a trade deficit? what do foreigners do with that extra money? where do they purchase those assets?

it sends more money to foreign countries than it receives in return; use it to purchase interest-bearing assets; wherever they receive the highest return

If a US real exchange rate appreciates, US goods become...

more expensive relative to foreign goods

if someone from Mexico wants to buy something in the US they need to go to the bank and exchange pesos for dollars. the number of dollars they get back for their pesos depend on what?

nomina exchange rate

e=

nominal exchange rate, foreign currency per unit of domestic currency

law of one price

notion that a good should sell for the same price in all markets

Net Capital Outflow (NCO) aka Net Foreign Investment

our purchase of foreign assets-foreign purchases of our assets

the nominal exchange rate is the...

rate at which a person can trade the currency of one country for another

natural rate hypothesis

the claim that unemployment eventually returns to its normal, or natural rate regardless of the rate of inflation

real exchange rate

the rate at which goods and services of one country trade for the goods and services of another, relative price of the goods and services of two countries

inflation tax

the revenue the government raises by creating money

purchasing power parity PPP

theory of exchange rates whereby a unit of any currency should be able to buy the same quantity of goods in all countries

6 variables that influence net exports

things that affect the relative desirability of a country's goods and services: 1. consumers' preferences for foreign and domestic goods 2. prices of goods at home and abroad 3. income of consumers at home and abroad 4. the exchange rates at which foreign currency trades for domestic currency 5. transportation costs 6. government policies

4 variables that influence NCO

things that affect the relative return on interest bearing assets in different countries: 1. real interest rates paid on foreign assets 2. real interest rates paid on domestic assets 3. perceived risks of holding foreign assets 4. government policies affecting foreign ownership of domestic assets

how can saving be used?

to finance domestic investment or buy assets abroad

when do national savings increase?

when an economy grows

real exchange rate formula

(e x P)/P*

calculate the real exchange rate, measured as Mexican lattes per US latte e=10 pesos per $; price of a latte: P=$3 in US; P*=24 pesos in Mexico

1.25 Mexican lattes per US latte

what is a price of a US latte measured in pesos? e=10 pesos per $; price of a latte: P=$3 in US; P*=24 pesos in Mexico

30 pesos per US latte

Net exports (NX), aka the trade balance

= value of exports - value of imports; measures the imbalance in a country's trade in goods and services

Y=

C+I+G+NX(X-M)

A Chinese company exchanges yuan (Chinese currency) for dollars. It uses these dollars to purchase scrap metal from a US company. As a result of these transactions, Chinese...

NX decrease and US NCO decreases


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