Macro Section 8 Test
Why would a nation (el tigardo, for example) want to revalue its own currency?
-el tigardo in inflationary gap -now takes more USD to buy one tig, so el tigardo goods seem ore expensive to americans, so el tigardos exports decrease, shifting AD left and reducing inflation
The exchange rate is
JUST A PRICE!!!!!
what happens to the US if canada goes into a recession?
american gdp decreases since candadians dont have as much money to spend on US goods
IF japan has a higher interest rate than the US, what happens in terms of capital inflow/outflow
-US wants to invest in japan because of a higher rate of return there -US sends over US DOLLARS to get financial assets from japan -These dollars are capital outflow from US and capital inflow to japan
cons of fixed exchange rate
- limit the effect of monetary policy -country must keep huge amount of foreign currency on hand - even large reserves of foreign currency can be exhausted quickly
pros of fixed exchange rate
- limit the effect of monetary policy -stability
What would happen to the value of the tig if el tigardo increased its money supply? and as a result of this what would happen to exports?
- interest rates down, I up, AD up - foreigners would seek alternative nations with higer interest rates to invest in financial assets, do demand for tig decreases -el tigardians would also seek nationas with higher interest rates in which to invest in financial assets, so the supply of tigs in the exchange market would increase - the result is a depreciated tig - exports in tig will increaze
Why would a nation (el tigardo, for example) want to devalue its own currency?
-el tigardo may be in a recessionary gap -it now takes fewer USD to buy one tig, so goods in el tigardo will feel less expensive to americans, so el tigardos exports will increase, shifting AD right and closing the recessionary gap
what do americans do if their is inflation in mexico?
1 USD will buy less pesos, and thus less mexican goods so americans don't buy as much from mexico
progression of recession hitting canada (what happens to the value of the USD?)
1. recession hits canada 2. canadians decrease demand for amerucrican goods 3. demand for USD decreases (because canadians wont be purchasing as much US goods so they wont need as much USD) so the dollar depreciates 4.the deprciating USD means goods in US feel more affordable to canadians **the depricated USD puts the brakes on diminsihed exports to canada and negative impact on US is lessened
what are the three things that a country (china, for example) can do to fix its currency?
1. sell countries own currency in the exchange market OR buy up the surplus of countries own currency in the foreign exchange market (EXCHANGE MARKET INTERVENTION) 2. change interest rates 3. limit rights of individuals to buy foreign currency, resulting in a decrease in the supply of yen and rising price OR limit ability of foreigners to buy yen
. Which of the following is an example of foreign direct investment? A A United States automobile manufacturer building a steel plant in Russia B A United States citizen purchasing corporate bonds issued by a French manufacturing firm C A Mexican citizen purchasing United States Treasury bills D The Federal Reserve purchasing Japanese yen E Immigrant workers in the United States sending money to their native country
A A United States automobile manufacturer building a steel plant in Russia
f the United States government increases deficit spending, which of the following will occur as a result of the change in the interest rate? A The United States dollar will appreciate in foreign exchange markets. B Household savings in the United States will decrease. C The United States exports will increase. D The demand for United States dollars will decrease. E Private investment in plant and equipment in the United States will increase.
A The United States dollar will appreciate in foreign exchange markets.
50. Which of the following is true if exchange rates are freely floating? A The free market forces of demand and supply determine the equilibrium exchange rates. B The demand curve for the currency is upward sloping. C Only nominal values of currency can be determined. D The market determines the equilibrium value of the currency, but governments buy and sell currency at a fixed rate. E Governments are unable to affect the international value of their currency.
A The free market forces of demand and supply determine the equilibrium exchange rates.
Assume that the inflation rate in Country X is very high relative to the inflation rates in all of its trading partners. Which of the following is likely to happen to Country X's currency on the foreign exchange market? A The demand curve for the currency will shift to the right, and the currency will appreciate. B The demand curve for the currency will shift to the left, and the currency will depreciate. C The supply curve for the currency will shift to the left, and the currency will appreciate. D The supply curve for the currency will shift to the left, and the currency will depreciate. E There will be no shift in the demand curve for the currency, but the currency will depreciate.
B The demand curve for the currency will shift to the left, and the currency will depreciate.
Assume that Country X and Country Y are trading partners. If the average income in Country X increases, which of the following will occur in the foreign exchange market? A The demand for Country X's currency will increase, and Country X's currency will appreciate. B The demand for Country Y's currency will increase, and Country X's currency will depreciate. C The demand for Country Y's currency will increase, and Country X's currency will appreciate. D The supply of Country X's currency will decrease, and Country X's currency will appreciate. E The supply of Country Y's currency will increase, and Country Y's currency will depreciate.
B The demand for Country Y's currency will increase, and Country X's currency will depreciate.
22. Country A both imports and produces tea. If Country A imposes a tariff on imported tea, which of the following will occur? A Tea consumption will increase. B Domestic tea production will decrease. C Employment in the domestic tea industry will increase. D The domestic price of tea will decrease. E Country A's currency will depreciate.
C
An increase in a government's deficit spending will most likely affect a nation in an open economy in which of the following ways? A The economy will experience financial capital outflows, and its currency will appreciate. B The economy will experience financial capital outflows, and its currency will depreciate. C The economy will experience financial capital inflows, and its currency will appreciate. D The economy will experience financial capital inflows, and its currency will depreciate. E The economy will experience no change in financial capital flows, and the value of its currency will not change.
C The economy will experience financial capital inflows, and its currency will appreciate.
8. An increase in which of the following would reduce the United States balance-of-trade deficit? A United States demand for foreign goods B United States rate of inflation compared to other countries C The value of foreign currency relative to the United States dollar D The federal budget deficit E United States interest rates compared to other countries
C The value of foreign currency relative to the United States dollar
30. Assume that the United States current account balance is zero. If the United States dollar appreciates against the Japanese yen, then demand for United States exports will A increase and result in a deficit in the United States financial account B increase and result in a surplus in the United States financial account C decrease and result in a surplus in the United States financial account D decrease and result in a deficit in the United States financial account E remain unchanged because the surplus in the current account will be offset by the deficit in the financial account
C decrease and result in a surplus in the United States financial account
The financial account is a measure of _________________
CAPITAL INFLOW
25. England and France are trading partners. If England's currency, the pound sterling, depreciates relative to France's currency, the euro, which of the following will happen? A French exports to England will increase. B French imports from England will decrease. C Aggregate demand will increase in France. D Aggregate demand will increase in England. E Aggregate demand will decrease in England.
D Aggregate demand will increase in England.
A depreciation of the United States dollar in foreign exchange markets will result in which of the following? A A decrease in aggregate demand because net exports will increase. B A decrease in aggregate demand because imports will decrease. C A decrease in aggregate demand because exports will increase. D An increase in aggregate demand because imports will decrease. E An increase in aggregate demand because exports will decrease.
D An increase in aggregate demand because imports will decrease.
27. An increase in a country's current account surplus will result in which of the following in the short run? A A decrease in the country's government budget surplus B A decrease in the country's national savings C A decrease in the country's financial account deficit D An increase in the country's net financial capital outflows E An increase in the country's national debt
D An increase in the country's net financial capital outflows
If consumers in Canada increase their demand for products that are manufactured in India, which of the following will occur? A The Indian rupee will depreciate. B The Canadian dollar will appreciate. C India's financial capital inflow will increase. D Canada's financial capital inflow will increase. E The supply of Canadian dollars will decrease.
D Canada's financial capital inflow will increase.
If the exchange rate between the USD and bridging pound changed from 2 dollars per euro to 3 dollars per euro, than the US dollar would
Depreciate, making us imports from Britain more expensive
. Assume a country has an open economy and a flexible exchange rate system. An increase in the country's government budget deficit would most likely cause A a decrease in real interest rate and a decrease in net exports B a decrease in real interest rate and a decrease in domestic investment in plant and equipment C no change in real interest rate and a decrease in net exports D an increase in real interest rate and an increase in domestic investment in plant and equipment E an increase in real interest rate and a decrease in net exports
E an increase in real interest rate and a decrease in net exports
The exchange rate ensures that
Fincancial account and current account actually offset eachother
In one year, spending on consumption, investment, and government spending was 103% of GDP. This could only be true if
Hey exports were negative
Which of the following will cause US dollar to depreciate relative to the euro?
Increase in household income in US
Ex: June: one USD can buy 12.5 pesos -12.5 pesos can buy one USD April: One USD can by 12.1 pesos -12.1 pesos can buy one USD what happened to the USD and the peso from april to june?
THE USD appreciates the peso depreciated
current account
The balance of payments on goods and services and factor income and net international transfer payments DONT CREATE LIABILITIES
an increase in capital inflows to the US leads to
a stronger USD, which creates a decrease in net exports since they are able to buy more from other counries (more imports)
example of factor income
an american company, walmart, profits from stores in europe
if the USD has become more expensive, (for example, it costs more pesos to get one dollar) then the dollar has
appreciates
Revaluation
appreciation on purpose
example of financial account transaction (private sales and purchases of assets)
coke buys fatory in mexico, payments to foreigners
Devaluation
depreciation on prupose
trade balance
exports- imports NOT INCLUDING SERVICES
balance of payments on goods and services
exports-imports
two exchange rate regimes
fixed exchange rate- keeps exchange rate at particular target floatin exchange rate- lets exchange rate go whereverthe market takes it
capital inflow
foreign savings that are available to finance domestic spending :LF GRAPH
international transfers
funds sent by residents of one country to residents of another
factor income
payments for the use of factors of production owned by residents of other countries
financial account includes
transactions involving gov agencies (central bank) private sales and purchases of assets
financial account
transactions that involve the sales or purchases of assets and therefore DO CREATE FUTURE LIABILITIES
If americans want more euros, this means
we demand more euros. and in order to obtain these euros we must supply more US dollars to the exchange market