Macro Chap 25

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Author:
bwood190
ID:
289965
Filename:
Macro Chap 25
Updated:
2014-11-25 14:02:11
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Macro test
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Macro test 3
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  1. Foreign Exchange Mkt
    • where currencies are exchanged. 
    • Not a place, made up of 1000's
  2. Exchange Rate
    • Price at which one currency exchanges for another
    • Appreciates and depreciates
  3. Demand in foreign exchange mkt (4 things)
    • qty demanded depends on 
    • 1. exchange rate
    • 2. World demand for cdn exports
    • 3. interest rates in cad and other countries
    • 4. expected future exchange rate
  4. Law of Demand for Foreign Exchange
    other things the same, higher exchange rate, smaller qty cdn dollars demanded in mkt
  5. Exports effect
    • larger value of cdn exports larger qty of cad demanded
    • value of exports depends on value of cdn g/s in value of foreign dollar and these prices depend on exchange rate
    • lower exchange rate, lower price for foreigners, more g/s bought
  6. Expected Profit Effect (Demand)
    • larger expected profit from holding cad, greater qty demanded in foreign mkt
    • expected profit depends on exchange rate
    • lower exchange rate today, greater expected profit in future, greater qty demanded
  7. Supply in Foreign Exchange mkt
    • qty cad supplied = amount traders plan to sell
    • depends on 
    • 1. exchange rate
    • 2. cdn demand for imports
    • 3. interest rates in canada and other countries
    • 4. expected future exchange rates
  8. Law of Supply of Foreign Exchange
    • other things same, higher exchange rate greater qty cad supplied in foreign mkt
    • exchange rate influences for two reasons
    • 1. Imports effect
    • 2. Expected profit effect
  9. Imports Effect
    • larger value of cdn imports, larger qty of cad supplied
    • value of cdn imports depends on prices of foreign produced g/s expressed in cad.. These prices depend on exchange rate
    • higher exchange rate, prices of foreign goods lower to canadians, more imports
  10. Expected Profit Effect (supply)
    • similar to demand but in opposite direction
    • higher exchange rate today, other things same, larger expected profit today so more cad supplied
  11. Change in Demand for CAD
    • world demand for cdn exports
    • cdn interest rate relative to foreign rate
    • expected future exchange rate
  12. World Demand for Cdn Exports
    increase in demand for cdn exports increases demand for CAD
  13. Cdn interest rate relative to foreign interest rate
    higher rate that can be earned in canada = more demand for CAD
  14. Cdn Interest Rate Differential
    • cdn rate minus foreign rate
    • larger differential larger demand for cad
  15. Expected Future Exchange Rate
    rise in expected rate increase profit people expect to make, demand for cad increases today
  16. Change in Supply of CAD
    • cdn demand for imports
    • cdn interest rate relative to foreign interest rate
    • expected future exchange rate
  17. cdn demand for imports
    increase in cdn demand for imports increases supply of cad in foreign mkt
  18. cdn interest rate relative to foreign interest rate (supply)
    • opposite to demand
    • larger differential, smaller supply of cad in foreign mkt
    • b/c people hold on to cdn assets, don't sell cad as much
  19. Expected future exchange rate (supply)
    • fall in future expected, decreases profit made by holding CAD, decreases qty people want to hold
    • people sell CAD, supply increases
  20. Changes in Exchange Rate
    • if demand increases w/ no change in supply exchange rate rises
    • look at graph to figure out
  21. What changes expected exchange rate?
    • change in demand for cdn exports
    • cdn demand for imports
    • cdn interest rate relative to world
  22. Arbitrage
    • buying in one mkt, selling for higher price in another unrelated mkt
    • can't be done b/c prices are the same around the world
    • brings interest rate parity and purchasing power parity
  23. Interest Rate parity
    • equal rates of return
    • funds move to get the highest expected return
    • changes in demand will change exchange rate and bring equal returns
  24. Purchasing Power Parity
    • equal value of money
    • if most prices increase in canada but not japan, value of CAD will drop. Expected exchange rate will drop
    • decrease demand, increase supply 
    • exchange rate will change until prices are equal
    • vice versa
  25. Real Exchange Rate
    • relative price of cdn produced g/s to foreign produced g/s
    • qty of real GDP of other countries that a unit of cdn real GDP can buy
    • RER = (E X P)/P*
    • E = exchange rate
    • P = cdn price level
    • P* = jpn price level
  26. S/T RER
    • if nominal exchange changes, real also changes
    • b/c price levels and prices don't change every time exchange rate changes
    • changes in real exchange bring s/t changes in qty of imports demanded and qty exports supplied
  27. L/T RER
    • nominal exchange rate and price level are determined together and real exchange does NOT change when nominal exchange changes
    • demand and supply in mkt for g/s determine prices
    • if dollar appreciates prices will change
  28. Flexible Exchange Rate
    • determined by demand and supply in foreign exchange mkt w/ no direct intervention from central bank
    • is influenced by central banks actions
    • ex. world will respond to change in cdn interest rate
  29. Fixed Exchange Rate
    • rate determined by decision of gov or central bank to block unregulated supply and demand forces
    • no limit to cash central bank can sell, but there is a limit on amount they can buy
  30. Crawling Peg
    • exchange rate that follows a path determined by gov or central bank
    • works like fixed, but target value changes
    • developing countries use this to control inflation
  31. Balance of pmts accts
    • records intnl trading borrowing and lending in 3 accts
    • current
    • capital and financial
    • official settlements
    • sum of all 3 accts ALWAYS = 0
  32. Current Account
    • records receipts from exports of g/s sold abroad, pmts for g/s from abroad, net interest income paid abroad, and net xfers abroad (foreign aid)
    • balance = exports - imports - net interest inc - net xfers
  33. Capital and Financial Acct
    • records foreign investment in canada minus cdn investment abroad
    • has statistical discrepancy
  34. Official Settlements Acct
    • records change in cdn official reserves (gov holdings of foreign currency)
    • if reserves increase, balance is negative b/c holding foreign currency is similar to investing
  35. Net Borrower
    borrows more from rest of world than lends
  36. Net Lender
    lends more to rest of world than borrows
  37. Debtor Nation
    • nation that during entire history has borrowed more from rest of world than has lent
    • outstanding debt to rest of world greater than claims to rest of world
  38. Creditor Nation
    nation that during entire history has invested more in rest of world than other countries have invested in it
  39. Current Acct Balance
    • CAB = NX + Net interest inc + net xfers
    • nx = net exports
  40. Gov Sector Balance
    • = net taxes - gov expenditure on g/s
    • if positive, gov sector surplus lent to other sectors
    • if negative, gov deficit must be financed by borrowing from other sectors
    • sum of fed, prov, and local gov
  41. Private Sector Balance
    • = saving - investment
    • if positive, surplus lent to other sectors
    • if negative, deficit financed by borrowing from other sectors

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