# Lecture 2. Output, interest rates and exchange rates: the Mundell Fleming model.

Size: px
Start display at page:

Download "Lecture 2. Output, interest rates and exchange rates: the Mundell Fleming model."

Transcription

1 Lecture 2. Output, interest rates and exchange rates: the Mundell Fleming model. Carlos Llano (P) & Nuria Gallego (TA) References: these slides have been developed based on the ones provided by Beatriz de Blas and Julián Moral (UAM), as well as the official materials from Mankiw, 2009 and Blanchard, 2007 books. We are grateful for that. 1

2 Learning objectives The Mundell Fleming model (IS LM for the small open economy) Causes and effects of interest rate differentials Arguments for fixed versus floating exchange rates How to derive the aggregate demand curve for a small open economy 2

3 Outline 1. The Mundell Fleming model 2. Floating and fixed exchange rates 1. Fiscal policy 2. Monetary policy 3. Trade policy 3. Interest rate differentials 4. Floating vs. Fixed exchange rates 5. Mundell Fleming and the AD curve 3

4 INTRODUCTION 4

5 Introduction What are the determinants of the exchange rate? How can a government affect the exchange rate? How are exchange rates fixed? What are the effects of monetary and fiscal policy in an open economy? 5

6 1. THE MUNDELL FLEMING MODEL 6

7 1. The Mundell Fleming model Key assumption: Small open economy with perfect capital mobility. r = r* Goods market equilibrium the IS* curve: Y C( Y TR T ) I ( r* ) G NX ( e) where e = nominal exchange rate = foreign currency per unit of domestic currency 7

8 The IS* curve: goods market eq m Y C( Y TR T ) I ( r* ) G NX ( e) The IS* curve is drawn for a given value of r*. e Intuition for the slope: e NX Y IS* Y 8

9 The LM* curve: money market eq m M P L( r*, Y ) The LM* curve is drawn for a given value of r* is vertical because: given r*, there is only one value of Y that equates money demand with supply, regardless of e. e LM* Y 9

10 Equilibrium in the Mundell Fleming model Y C( Y TR T ) I ( r* ) G NX ( e) M P L( r*, Y ) e LM* equilibrium exchange rate equilibrium level of income IS* Y 10

11 2. FLOATING AND FIXED EXCHANGE RATES 11

12 2. Floating & fixed exchange rates In a system of floating exchange rates, e is allowed to fluctuate in response to changing economic conditions. In contrast, under fixed exchange rates, the central bank trades domestic for foreign currency at a predetermined price. We now consider fiscal, monetary, and trade policy: first in a floating exchange rate system, then in a fixed exchange rate system. 12

13 2.1 Fiscal policy under floating exchange rates Y C( Y TR T ) I ( r* ) G NX ( e) M P L( r*, Y ) At any given value of e, a fiscal expansion increases Y, shifting IS* to the right. Results: e > 0, Y = 0 e 2 e 1 e * LM1 Y 1 * IS 2 * IS 1 Y 13

14 Lessons about fiscal policy In a small open economy with perfect capital mobility, fiscal policy is incapable of affecting real GDP. Crowding out closed economy: Fiscal policy crowds out investment by causing the interest rate to rise. small open economy: Fiscal policy crowds out net exports by causing the exchange rate to appreciate. 14

15 2.2 Monetary policy under floating exchange rates Y C( Y TR T ) I ( r* ) G NX ( e) M P L( r*, Y ) An increase in M shifts LM* right because Y must rise to restore eq m in the money market. e 1 e 2 e LM * 1 LM * 2 Results: e < 0, Y > 0 Y 1 Y 2 * IS 1 Y 15

16 Lessons about monetary policy Monetary policy affects output by affecting one (or more) of the components of aggregate demand: closed economy: M r I Y small open economy: M e NX Y Expansionary monetary policy does not raise world aggregate demand, it shifts demand from foreign to domestic products. Thus, the increases in income and employment at home come at the expense of losses abroad. 16

17 2.3 Trade policy under floating exchange rates Y C( Y TR T ) I ( r* ) G NX ( e) M P L( r*, Y ) At any given value of e, a tariff or quota reduces imports, increases NX, and shifts IS* to the right. e 2 e 1 e * LM1 * IS 2 Results: e > 0, Y = 0 Y 1 * IS 1 Y 17

18 Lessons about trade policy Import restrictions cannot reduce a trade deficit. Even though NX is unchanged, there is less trade: the trade restriction reduces imports the exchange rate appreciation reduces exports Less trade means fewer gains from trade. Import restrictions on specific products save jobs in the domestic industries that produce those products, but destroy jobs in export producing sectors. Hence, import restrictions fail to increase total employment. Worse yet, import restrictions create sectorial shifts, which cause frictional unemployment. 18

19 3. Fixed exchange rates Under a system of fixed exchange rates, the country s central bank stands ready to buy or sell the domestic currency for foreign currency at a predetermined rate. In the context of the Mundell Fleming model, the central bank shifts the LM* curve as required to keep e at its pre announced rate. This system fixes the nominal exchange rate. In the long run, when prices are flexible, the real exchange rate can move even if the nominal rate is fixed. 19

20 Fiscal policy under fixed exchange rates Under floating rates, fiscal policy is ineffective at changing output. Under fixed rates, fiscal policy is very effective at changing output. Results: e = 0, Y > 0 e 1 e LM Y 1 * 1 LM Y 2 * 2 * IS 2 * IS 1 Y 20

21 Monetary policy under fixed exchange rates Under floating rates, monetary policy is very effective at changing output. Under fixed rates, monetary policy cannot be used to affect output. e 1 e LM LM * 1 * 2 Results: e = 0, Y = 0 Y 1 * IS 1 Y 21

22 Trade policy under fixed exchange rates Under floating rates, import restrictions do not affect Y or NX. Under fixed rates, import restrictions increase Y and NX. e LM * 1 LM * 2 But, these gains come at the expense of other countries, as the policy merely shifts demand from foreign to domestic goods. e 1 Y 1 Y 2 * IS 2 * IS 1 Y 22

23 Summary of policy effects in the Mundell Fleming model type of exchange rate regime: floating impact on: fixed Policy Y e NX Y e NX fiscal expansion mon. expansion import restriction

24 3. INTEREST RATE DIFFERENTIALS 24

25 3. Interest rate differentials Two reasons why r may differ from r* country risk: The risk that the country s borrowers will default on their loan repayments because of political or economic turmoil. Lenders require a higher interest rate to compensate them for this risk. expected exchange rate changes: If a country s exchange rate is expected to fall, then its borrowers must pay a higher interest rate to compensate lenders for the expected currency depreciation. 25

26 Differentials in the M F model r r * where is a risk premium. Substitute the expression for r into the IS*and LM* equations: Y C( Y TR T ) I ( r * ) G NX ( e) M P L( r *, Y ) 26

27 The effects of an increase in IS* shifts left, because r I LM* shifts right, because r (M/P ) d, so Y must rise to restore money market eq m. e 1 e LM * 1 LM * 2 Results: e < 0, Y > 0 e 2 Y 1 Y 2 * IS 1 * IS 2 Y 27

28 The effects of an increase in The fall in e is intuitive: An increase in country risk or an expected depreciation makes holding the country s currency less attractive. Note: an expected depreciation is a self fulfilling prophecy. The increase in Y occurs because the boost in NX (from the depreciation) is even greater than the fall in I (from the rise in r ). 28

29 Why income might not rise The central bank may try to prevent the depreciation by reducing the money supply The depreciation might boost the price of imports enough to increase the price level (which would reduce the real money supply) Consumers might respond to the increased risk by holding more money. Each of the above would shift LM* leftward 29

30 4. FLOATING VS. FIXED EXCHANGE RATES 30

31 The Mundell Fleming model and the Optimal Currency Areas [OCAs] Conclusions from the Mundell Fleming model Under floating exchange rates FP useless to expand output MP very useful: liquidity effect + exports boom Under fixed exchange rates FP very useful to expand output MP useless What should countries choose: floating or fixed exchange rates? Under which circumstances are floating exchange rates preferred to fixed exchange rates? 31

32 Floating vs. Fixed Exchange Rates Argument for floating rates: allows monetary policy to be used to pursue other goals (stable growth, low inflation) Arguments for fixed rates: if credible, avoids uncertainty and volatility, making international transactions easier disciplines monetary policy to prevent excessive money growth & hyperinflation ( external anchor ) 32

33 The impossible trinity A country can not hold full capital mobility together with autonomous monetary policy and fixed exchange rates. A country should choose two angles of the triangle, and reject the third one. Option 1 (USA.) Free capital movement Option 2 (Hong Kong) Autonomous monetary policy Option 3 (China) Fixed exchange rate

34 Optimum currency areas (OCAs) R. Mundell (1961): What is the appropriate domain of a currency area? Conditions under which a group of countries may join a fixed exchange rate regime or even adopt a common currency: They must suffer similar demand shocks same policies in response (symmetric vs. asymmetric shocks); If they suffer different shocks, they must have high input factors mobility and use fiscal policy to stabilize the GDP. Question: according to this theory, are Euro area countries an OCA? 34

35 Optimum currency areas (OCAs) Some reasons in favor of a monetary union: avoid transactions costs and risk in international trade; avoid the temptation of competitive devaluations ; avoid excessive government indebtedness, and avoid the risk for rising inflation to erode the value of public debt. Question: according to this theory, is the Stability and Growth Pact a good idea? 35

36 CASE STUDY: The Mexican Peso Crisis 35 U.S. Cents per Mexican Peso /10/94 8/29/94 10/18/94 12/7/94 1/26/95 3/17/95 5/6/95 36

37 CASE STUDY: The Mexican Peso Crisis 35 U.S. Cents per Mexican Peso /10/94 8/29/94 10/18/94 12/7/94 1/26/95 3/17/95 5/6/95 37

38 The Peso Crisis didn t just hurt Mexico Foreign goods more expensive to Mexicans U.S. firms lost revenue Hundreds of bankruptcies along U.S. Mexico border Mexican assets worth less in dollars Affected retirement savings of millions of citizens in the U.S. and elsewhere 38

39 Understanding the crisis In the early 1990s, Mexico was seen as an attractive place for foreign investment. During 1994, political developments caused an increase in Mexico s risk premium ( ): peasant uprising in Chiapas assassination of leading presidential candidate Another factor: The Federal Reserve raised U.S. interest rates several times during 1994 to prevent U.S. inflation. (So, r* > 0) 39

40 Understanding the crisis These events put downward pressure on the peso. Mexico s central bank had repeatedly promised foreign investors that it would not allow the peso s value to fall, so it bought pesos and sold U.S. dollars to prop up the peso exchange rate. Doing this requires that Mexico s central bank have adequate reserves of dollars. Did it? 40

41 International Reserves of Mexico s Central Bank (in U.S. Dollars) December 1993 \$28 billion August 17, 1994 \$17 billion December 1, 1994 \$ 9 billion December 15, 1994 \$ 7 billion 41

42 The devaluation Dec. 20: Mexico devalues the peso by 13% (fixes e at 25 cents instead of 29 cents) Investors panic!!! and realize the central bank must be running out of reserves, Investors dump their Mexican assets and pull their capital out of Mexico. Dec. 22: central bank s reserves nearly gone. It abandons the fixed rate and lets e float. In a week, e falls another 30%. 42

43 The rescue package 1995: U.S. & IMF set up \$50 billion line of credit to provide loan guarantees to Mexico s govt. This helped restore confidence in Mexico, reduced the risk premium. After a hard recession in 1995, Mexico began a strong recovery from the crisis. 43

44 CASE STUDY: The Southeast Asian crisis Problems in the banking system eroded international confidence in SE Asian economies. Risk premiums and interest rates rose. Stock prices fell as foreign investors sold assets and pulled their capital out. Falling stock prices reduced the value of collateral used for bank loans, increasing default rates, which exacerbated the crisis. Capital outflows depressed exchange rates. 44

45 The S.E. Asian Crisis exchange rate % change from 7/97 to 1/98 stock market % change from 7/97 to 1/98 nominal GDP % change Indonesia 59.4% 32.6% 16.2% Japan 12.0% 18.2% 4.3% Malaysia 36.4% 43.8% 6.8% Singapore 15.6% 36.0% 0.1% S. Korea 47.5% 21.9% 7.3% Taiwan 14.6% 19.7% n.a. Thailand 48.3% 25.6% 1.2% ( ) U.S. n.a. 2.7% 2.3% 45

46 5. MUNDELL FLEMING AND THE AD CURVE 46

47 Mundell Fleming and the AD curve Previously, we examined the M F model with a fixed price level. To derive the AD curve, we now consider the impact of a change in P in the M F model. We now write the M F equations as: (IS*) Y C( Y TR T ) I ( r* ) G NX ( e) ( LM* ) M P L( r*, Y ) (Earlier in this chapter, we could write NX as a function of e because e and move in the same direction when P is fixed.) 47

48 Deriving the AD curve Why AD curve has negative slope: P (M/P) left LM shifts NX Y 2 1 P P 2 P 1 LM*(P 2 ) LM*(P 1 ) Y 2 Y 1 Y 2 Y 1 IS* Y AD Y 48

49 From the short run to the long run If Y1 Y, then there is downward pressure on prices. Over time, P will move down, causing (M/P ) NX Y 1 2 P LM*(P 1 ) Y1 P 1 SRAS 1 Y 1 LM*(P 2 ) Y LRAS Y IS* Y P 2 SRAS 2 AD Y 49

50 Large: between small and closed Many countries are neither closed nor small open economies. A large open economy such as the U.S. or the Eurozone are in between the polar cases of closed & small open. Consider a monetary expansion: Like in a closed economy, M > 0 r I (though not as much) Like in a small open economy, M > 0 NX (though not as much) 50

51 Chapter summary 1. Mundell Fleming model the IS LM model for a small open economy. takes P as given can show how policies and shocks affect income and the exchange rate 2. Fiscal policy affects income under fixed exchange rates, but not under floating exchange rates. 51

52 3. Monetary policy Chapter summary affects income under floating exchange rates. Under fixed exchange rates, monetary policy is not available to affect output. 4. Interest rate differentials exist if investors require a risk premium to hold a country s assets. an increase in this risk premium raises domestic interest rates and causes the country s exchange rate to depreciate. 52

53 Chapter summary 5. Fixed vs. floating exchange rates Under floating rates, monetary policy is available for purposes other than maintaining exchange rate stability. Fixed exchange rates reduce some of the uncertainty in international transactions. 53

### Chapter 17. Preview. Introduction. Fixed Exchange Rates and Foreign Exchange Intervention

Chapter 17 Fixed Exchange Rates and Foreign Exchange Intervention Slides prepared by Thomas Bishop Copyright 2009 Pearson Addison-Wesley. All rights reserved. Preview Balance sheets of central banks Intervention

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Chatper 34 International Finance - Test Bank MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The currency used to buy imported goods is A) the

### a) Aggregate Demand (AD) and Aggregate Supply (AS) analysis

a) Aggregate Demand (AD) and Aggregate Supply (AS) analysis Determinants of AD: Aggregate demand is the total demand in the economy. It measures spending on goods and services by consumers, firms, the

### Chapter 18. MODERN PRINCIPLES OF ECONOMICS Third Edition

Chapter 18 MODERN PRINCIPLES OF ECONOMICS Third Edition Fiscal Policy Outline Fiscal Policy: The Best Case The Limits to Fiscal Policy When Fiscal Policy Might Make Matters Worse So When Is Fiscal Policy

### Refer to Figure 17-1

Chapter 17 1. Inflation can be measured by the a. change in the consumer price index. b. percentage change in the consumer price index. c. percentage change in the price of a specific commodity. d. change

### 1) Explain why each of the following statements is true. Discuss the impact of monetary and fiscal policy in each of these special cases:

1) Explain why each of the following statements is true. Discuss the impact of monetary and fiscal policy in each of these special cases: a) If investment does not depend on the interest rate, the IS curve

### Chapter 13. Aggregate Demand and Aggregate Supply Analysis

Chapter 13. Aggregate Demand and Aggregate Supply Analysis Instructor: JINKOOK LEE Department of Economics / Texas A&M University ECON 203 502 Principles of Macroeconomics In the short run, real GDP and

### Chapter Outline. Chapter 13. Exchange Rates. Exchange Rates

Chapter 13, Business Cycles, and Macroeconomic Policy in the Open Economy Chapter Outline How Are Determined: A Supply-and-Demand Analysis The IS-LM Model for an Open Economy Macroeconomic Policy in an

### The Open Economy Revisited: The Mundell-Fleming Model and the Exchange-Rate Regime *

Martin Flodén martin.floden@hhs.se Stockholm School of Economics January 2010 The Open Economy Revisited: The Mundell-Fleming Model and the Exchange-Rate Regime When conducting monetary and fiscal policy,

### 1. a. Interest-bearing checking accounts make holding money more attractive. This increases the demand for money.

Macroeconomics ECON 2204 Prof. Murphy Problem Set 4 Answers Chapter 10 #1, 2, and 3 (on pages 308-309) 1. a. Interest-bearing checking accounts make holding money more attractive. This increases the demand

### MGE #13 Capital mobility and interest rates

MGE #13 Capital mobility and interest rates Loanable funds market and interest rates in the long-run Capital flows and monetary policy, with fixed exchange rates The Mexican crisis of 1994 1 From the last

### Econ 336 - Spring 2007 Homework 5

Econ 336 - Spring 2007 Homework 5 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The real exchange rate, q, is defined as A) E times P B)

Business Conditions Analysis Prof. Yamin Ahmad ECON 736 Sample Final Exam Name Id # Instructions: There are two parts to this midterm. Part A consists of multiple choice questions. Please mark the answers

### THE OPEN AGGREGATE DEMAND AGGREGATE SUPPLY MODEL.

THE OPEN AGGREGATE DEMAND AGGREGATE SUPPLY MODEL. Introduction. This model represents the workings of the economy as the interaction between two curves: - The AD curve, showing the relationship between

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Suvey of Macroeconomics, MBA 641 Fall 2006, Final Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Modern macroeconomics emerged from

### 2.5 Monetary policy: Interest rates

2.5 Monetary policy: Interest rates Learning Outcomes Describe the role of central banks as regulators of commercial banks and bankers to governments. Explain that central banks are usually made responsible

### Lecture 3: Int l Finance

Lecture 3: Int l Finance 1. Mechanics of foreign exchange a. The FOREX market b. Exchange rates c. Exchange rate determination 2. Types of exchange rate regimes a. Fixed regimes b. Floating regimes 3.

### D) surplus; negative. 9. The law of one price is enforced by: A) governments. B) producers. C) consumers. D) arbitrageurs.

1. An open economy is one in which: A) the level of output is fixed. B) government spending exceeds revenues. C) the national interest rate equals the world interest rate. D) there is trade in goods and

### The Fiscal Policy and The Monetary Policy. Ing. Mansoor Maitah Ph.D.

The Fiscal Policy and The Monetary Policy Ing. Mansoor Maitah Ph.D. Government in the Economy The Government and Fiscal Policy Fiscal Policy changes in taxes and spending that affect the level of GDP to

### South African Trade-Offs among Depreciation, Inflation, and Unemployment. Alex Diamond Stephanie Manning Jose Vasquez Erin Whitaker

South African Trade-Offs among Depreciation, Inflation, and Unemployment Alex Diamond Stephanie Manning Jose Vasquez Erin Whitaker April 16, 2003 Introduction South Africa has one of the most unique histories

### Chapter 11. International Economics II: International Finance

Chapter 11 International Economics II: International Finance The other major branch of international economics is international monetary economics, also known as international finance. Issues in international

### SHORT-RUN FLUCTUATIONS. David Romer. University of California, Berkeley. First version: August 1999 This revision: January 2012

SHORT-RUN FLUCTUATIONS David Romer University of California, Berkeley First version: August 1999 This revision: January 2012 Copyright 2012 by David Romer CONTENTS Preface vi I The IS-MP Model 1 I-1 Monetary

### QUESTION 1: SHORT VERSUS MEDIUM RUN. 30 points

QUESTION 1: SHORT VERSUS MEDIUM RUN. 30 points Consider an economy that fits the AS-AD model. The labor market equilibrium is given by the AS curve. The equilibrium in the goods market is given by the

### Chapter 17. Fixed Exchange Rates and Foreign Exchange Intervention. Copyright 2003 Pearson Education, Inc.

Chapter 17 Fixed Exchange Rates and Foreign Exchange Intervention Slide 17-1 Chapter 17 Learning Goals How a central bank must manage monetary policy so as to fix its currency's value in the foreign exchange

### The Open Economy. Nominal Exchange Rates. Chapter 10. Exchange Rates, Business Cycles, and Macroeconomic Policy in the Open Economy

Chapter 10 Exchange Rates, Business Cycles, and Macroeconomic Policy in the Open Economy Economics 282 University of Alberta The Open Economy Two aspects of the interdependence of the world economies:

### Econ 202 H01 Final Exam Spring 2005

Econ202Final Spring 2005 1 Econ 202 H01 Final Exam Spring 2005 1. Which of the following tends to reduce the size of a shift in aggregate demand? a. the multiplier effect b. the crowding-out effect c.

### Long run v.s. short run. Introduction. Aggregate Demand and Aggregate Supply. In this chapter, look for the answers to these questions:

33 Aggregate Demand and Aggregate Supply R I N C I L E S O F ECONOMICS FOURTH EDITION N. GREGOR MANKIW Long run v.s. short run Long run growth: what determines long-run output (and the related employment

### CHAPTER 16 EXCHANGE-RATE SYSTEMS

CHAPTER 16 EXCHANGE-RATE SYSTEMS MULTIPLE-CHOICE QUESTIONS 1. The exchange-rate system that best characterizes the present international monetary arrangement used by industrialized countries is: a. Freely

### Chapter 12: Gross Domestic Product and Growth Section 1

Chapter 12: Gross Domestic Product and Growth Section 1 Key Terms national income accounting: a system economists use to collect and organize macroeconomic statistics on production, income, investment,

### CAN INVESTORS PROFIT FROM DEVALUATIONS? THE PERFORMANCE OF WORLD STOCK MARKETS AFTER DEVALUATIONS. Bryan Taylor

CAN INVESTORS PROFIT FROM DEVALUATIONS? THE PERFORMANCE OF WORLD STOCK MARKETS AFTER DEVALUATIONS Introduction Bryan Taylor The recent devaluations in Asia have drawn attention to the risk investors face

### 0 100 200 300 Real income (Y)

Lecture 11-1 6.1 The open economy, the multiplier, and the IS curve Assume that the economy is either closed (no foreign trade) or open. Assume that the exchange rates are either fixed or flexible. Assume

### Econ 202 Section 4 Final Exam

Douglas, Fall 2009 December 15, 2009 A: Special Code 00004 PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 202 Section 4 Final Exam 1. Oceania buys \$40

### Lecture 10-1. The Twin Deficits

Lecture 10-1 The Twin Deficits The IS-LM model of the previous lectures endogenised the interest rate while assuming that the portion (NX 0 ) of net exports not dependent on income was exogenously fixed.

### ECON 4423: INTERNATIONAL FINANCE

University of Colorado at Boulder Department of Economics ECON 4423: INTERNATIONAL FINANCE Final Examination Fall 2005 Name: Answer Key Student ID: Instructions: This test is 1 1/2 hours in length. You

### 1 Multiple Choice - 50 Points

Econ 201 Final Winter 2008 SOLUTIONS 1 Multiple Choice - 50 Points (In this section each question is worth 1 point) 1. Suppose a waiter deposits his cash tips into his savings account. As a result of only

### 14.02 PRINCIPLES OF MACROECONOMICS QUIZ 3

14.02 PRINCIPLES OF MACROECONOMICS QUIZ 3 READ INSTRUCTIONS FIRST: Read all questions carefully and completely before beginning the quiz. Label all of your graphs, including axes, clearly; if we can t

### CH 10 - REVIEW QUESTIONS

CH 10 - REVIEW QUESTIONS 1. The short-run aggregate supply curve is horizontal at: A) a level of output determined by aggregate demand. B) the natural level of output. C) the level of output at which the

### Exchange Rate Policy in the Policy Analysis Matrix

Slide 1 Exchange Rate Policy in the Policy Analysis Matrix Scott Pearson Stanford University Lecture Program Scott Pearson is Professor of Agricultural Economics at the Food Research Institute, Stanford

### Economics 101 Multiple Choice Questions for Final Examination Miller

Economics 101 Multiple Choice Questions for Final Examination Miller PLEASE DO NOT WRITE ON THIS EXAMINATION FORM. 1. Which of the following statements is correct? a. Real GDP is the total market value

### Homework Assignment #3: Answer Sheet

Econ 434 Professor Ickes Homework Assignment #3: Answer Sheet Fall 2009 This assignment is due on Thursday, December 10, 2009, at the beginning of class (or sooner). 1. Consider the graphical model of

### Fixed vs Flexible Exchange Rate Regimes

Fixed vs Flexible Exchange Rate Regimes Review fixed exchange rates and costs vs benefits to devaluations. Exchange rate crises. Flexible exchange rate regimes: Exchange rate volatility. Fixed exchange

### LECTURE NOTES ON MACROECONOMIC PRINCIPLES

LECTURE NOTES ON MACROECONOMIC PRINCIPLES Peter Ireland Department of Economics Boston College peter.ireland@bc.edu http://www2.bc.edu/peter-ireland/ec132.html Copyright (c) 2013 by Peter Ireland. Redistribution

### Econ 202 Section 2 Final Exam

Douglas, Fall 2009 December 17, 2009 A: Special Code 0000 PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 202 Section 2 Final Exam 1. The present value

### Econ 202 Final Exam. Table 3-1 Labor Hours Needed to Make 1 Pound of: Meat Potatoes Farmer 8 2 Rancher 4 5

Econ 202 Final Exam 1. If inflation expectations rise, the short-run Phillips curve shifts a. right, so that at any inflation rate unemployment is higher. b. left, so that at any inflation rate unemployment

### Ch. 38 Practice MC 1. In international financial transactions, what are the only two things that individuals and firms can exchange? A.

Ch. 38 Practice MC 1. In international financial transactions, what are the only two things that individuals and firms can exchange? A. Currency and real assets. B. Services and manufactured goods. C.

### 1997 Asian Financial Crisis

1997 Asian Financial Crisis. Ed Vallorani 12/14/2009 Table of Contents Background 1 Japan The Lost Decade 4 Country Information China 6 Hong Kong 6 Taiwan 7 Indonesia 8 Japan 8 Korea 9 Philippines 10 Singapore

### The history of the Bank of Russia s exchange rate policy

The history of the Bank of Russia s exchange rate policy Central Bank of the Russian Federation Abstract During the post-soviet period of 1992 98, the monetary policy of the Bank of Russia was essentially

### Lecture 10: Open Economy & Crises

Lecture 10: Open Economy & Crises Today Open Economy Macroeconomics Key Readings Mishkin, Cht 24, Leddin/Walsh Cht 18. Learning Outcomes Theory. Extend ISLM to account for Imports/Exports Practice. Show

### 1. Explain what causes the liquidity preference money (LM) curve to shift and why.

Chapter 22. IS-LM in Action C H A P T E R O B J E C T I V E S By the end of this chapter, students should be able to: 1. Explain what causes the liquidity preference money (LM) curve to shift and why.

### MGE#12 The Balance of Payments

MGE#12 The Balance of Payments The Current Account, the Capital Account and the Balance of Payments Introduction to the Foreign Exchange Market Savings, Investment and the Current Account 1 From last session

### Econ 303: Intermediate Macroeconomics I Dr. Sauer Sample Questions for Exam #3

Econ 303: Intermediate Macroeconomics I Dr. Sauer Sample Questions for Exam #3 1. When firms experience unplanned inventory accumulation, they typically: A) build new plants. B) lay off workers and reduce

### CHAPTER 32 EXCHANGE RATES, BALANCE OF PAYMENTS, AND INTERNATIONAL DEBT

CHAPTER 32 EXCHANGE RATES, BALANCE OF PAYMENTS, AND INTERNATIONAL DEBT Chapter in a Nutshell Along with the flows of goods and services being traded between countries, there are corresponding flows of

### Homework #6 - Answers. Uses of Macro Policy Due April 20

Page 1 of 8 Uses of Macro Policy ue April 20 Answer all questions on these sheets, adding extra sheets where necessary. 1. Suppose that the government were to increase its purchases of goods and services

### In this chapter we learn the potential causes of fluctuations in national income. We focus on demand shocks other than supply shocks.

Chapter 11: Applying IS-LM Model In this chapter we learn the potential causes of fluctuations in national income. We focus on demand shocks other than supply shocks. We also learn how the IS-LM model

### THREE KEY FACTS ABOUT ECONOMIC FLUCTUATIONS

15 In this chapter, look for the answers to these questions: What are economic fluctuations? What are their characteristics? How does the model of demand and explain economic fluctuations? Why does the

### East Asia - A Case Study in the Global Economy

Opening Speech by Toshihiko Fukui, Governor of the Bank of Japan At the 14th International Conference hosted by the Institute for Monetary and Economic Studies, Bank of Japan, in Tokyo on May 30, 2007

### University of Lethbridge Department of Economics ECON 1012 Introduction to Macroeconomics Instructor: Michael G. Lanyi

University of Lethbridge Department of Economics ECON 1012 Introduction to Macroeconomics Instructor: Michael G. Lanyi CH 25 Exch Rate & BofP 1) Foreign currency is A) the market for foreign exchange.

### QUIZ 3 14.02 Principles of Macroeconomics May 19, 2005. I. True/False (30 points)

QUIZ 3 14.02 Principles of Macroeconomics May 19, 2005 I. True/False (30 points) 1. A decrease in government spending and a real depreciation is the right policy mix to improve the trade balance without

### S.Y.B.COM. (SEM-III) ECONOMICS

Fill in the Blanks. Module 1 S.Y.B.COM. (SEM-III) ECONOMICS 1. The continuous flow of money and goods and services between firms and households is called the Circular Flow. 2. Saving constitute a leakage

### Economics 152 Solution to Sample Midterm 2

Economics 152 Solution to Sample Midterm 2 N. Das PART 1 (84 POINTS): Answer the following 28 multiple choice questions on the scan sheet. Each question is worth 3 points. 1. If Congress passes legislation

### Solution. Solution. Monetary Policy. macroeconomics. economics

KrugmanMacro_SM_Ch14.qxp 10/27/05 3:25 PM Page 165 Monetary Policy 1. Go to the FOMC page of the Federal Reserve Board s website (http://www. federalreserve.gov/fomc/) to find the statement issued after

### Big Concepts. Balance of Payments Accounts. Financing International Trade. Economics 202 Principles Of Macroeconomics. Lecture 12

Economics 202 Principles Of Macroeconomics Professor Yamin Ahmad Big Concepts Balance of Payments Equilibrium The relationship between the current account, capital account and official settlements balance

### 3. a. If all money is held as currency, then the money supply is equal to the monetary base. The money supply will be \$1,000.

Macroeconomics ECON 2204 Prof. Murphy Problem Set 2 Answers Chapter 4 #2, 3, 4, 5, 6, 7, and 9 (on pages 102-103) 2. a. When the Fed buys bonds, the dollars that it pays to the public for the bonds increase

### I. Introduction to Aggregate Demand/Aggregate Supply Model

University of California-Davis Economics 1B-Intro to Macro Handout 8 TA: Jason Lee Email: jawlee@ucdavis.edu I. Introduction to Aggregate Demand/Aggregate Supply Model In this chapter we develop a model

### ANSWERS TO END-OF-CHAPTER PROBLEMS WITHOUT ASTERISKS

Part III Answers to End-of-Chapter Problems 97 CHAPTER 1 ANSWERS TO END-OF-CHAPTER PROBLEMS WITHOUT ASTERISKS Why Study Money, Banking, and Financial Markets? 7. The basic activity of banks is to accept

### European Monetary Union Chapter 20

European Monetary Union Chapter 20 1. Theory of Optimum Currency Areas 2. Background for European Monetary Union 1 Theory of Optimum Currency Areas 1.1 Economic benefits of a single currency Monetary effi

### Chapter 20. Output, the Interest Rate, and the Exchange Rate

Chapter 20. Output, the Interest Rate, and the Exchange Rate In Chapter 19, we treated the exchange rate as one of the policy instruments available to the government. But the exchange rate is not a policy

### Currency Crisis in Thailand:

Currency Crisis in Thailand: The Leading Indicators By Quan B. Lai Among the developing countries across the globe, those in Southeast Asia have experienced the most economic success within the last several

### CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY

CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY Learning goals of this chapter: What forces bring persistent and rapid expansion of real GDP? What causes inflation? Why do we have business cycles? How

### Chapter 10 Fiscal Policy Macroeconomics In Context (Goodwin, et al.)

Chapter 10 Fiscal Policy Macroeconomics In Context (Goodwin, et al.) Chapter Overview This chapter introduces you to a formal analysis of fiscal policy, and puts it in context with real-world data and

### With lectures 1-8 behind us, we now have the tools to support the discussion and implementation of economic policy.

The Digital Economist Lecture 9 -- Economic Policy With lectures 1-8 behind us, we now have the tools to support the discussion and implementation of economic policy. There is still great debate about

### CHAPTER 17 MACROECONOMIC POLICY IN AN OPEN ECONOMY

CHAPTER 17 MACROECONOMIC POLICY IN AN OPEN ECONOMY MULTIPLE-CHOICE QUESTIONS 1. A nation experiences internal balance if it achieves: a. Full employment b. Price stability c. Full employment and price

### Finance, Saving, and Investment

23 Finance, Saving, and Investment Learning Objectives The flows of funds through financial markets and the financial institutions Borrowing and lending decisions in financial markets Effects of government

### Chapter 6 Economic Growth

Chapter 6 Economic Growth 1 The Basics of Economic Growth 1) The best definition for economic growth is A) a sustained expansion of production possibilities measured as the increase in real GDP over a

### 11/6/2013. Chapter 16: Government Debt. The U.S. experience in recent years. The troubling long-term fiscal outlook

Chapter 1: Government Debt Indebtedness of the world s governments Country Gov Debt (% of GDP) Country Gov Debt (% of GDP) Japan 17 U.K. 9 Italy 11 Netherlands Greece 11 Norway Belgium 9 Sweden U.S.A.

### The Circular Flow of Income and Expenditure

The Circular Flow of Income and Expenditure Imports HOUSEHOLDS Savings Taxation Govt Exp OTHER ECONOMIES GOVERNMENT FINANCIAL INSTITUTIONS Factor Incomes Taxation Govt Exp Consumer Exp Exports FIRMS Capital

### FISCAL POLICY* Chapter. Key Concepts

Chapter 11 FISCAL POLICY* Key Concepts The Federal Budget The federal budget is an annual statement of the government s expenditures and tax revenues. Using the federal budget to achieve macroeconomic

### Answer: C Learning Objective: Money supply Level of Learning: Knowledge Type: Word Problem Source: Unique

1.The aggregate demand curve shows the relationship between inflation and: A) the nominal interest rate. D) the exchange rate. B) the real interest rate. E) short-run equilibrium output. C) the unemployment

### THE GREAT DEPRESSION OF FINLAND 1990-1993: causes and consequences. Jaakko Kiander Labour Institute for Economic Research

THE GREAT DEPRESSION OF FINLAND 1990-1993: causes and consequences Jaakko Kiander Labour Institute for Economic Research CONTENTS Causes background The crisis Consequences Role of economic policy Banking

### Problem Set for Chapter 20(Multiple choices)

Problem Set for hapter 20(Multiple choices) 1. According to the theory of liquidity preference, a. if the interest rate is below the equilibrium level, then the quantity of money people want to hold is

### Study Questions (with Answers) Lecture 14 Pegging the Exchange Rate

Study Questions (with Answers) Page 1 of 7 Study Questions (with Answers) Lecture 14 the Exchange Rate Part 1: Multiple Choice Select the best answer of those given. 1. Suppose the central bank of Mexico

### GOVERNMENT ECONOMIC OBJECTIVES AND POLICIES. Textbook, Chapter 26 [pg 317-328]

GOVERNMENT ECONOMIC OBJECTIVES AND POLICIES Textbook, Chapter 26 [pg 317-328] Name: Class: Learning outcomes: Identify government economic objectives. Explain the main stages of the business cycle. Explain

### Thinkwell s Homeschool Economics Course Lesson Plan: 36 weeks

Thinkwell s Homeschool Economics Course Lesson Plan: 36 weeks Welcome to Thinkwell s Homeschool Economics! We re thrilled that you ve decided to make us part of your homeschool curriculum. This lesson

### Chapter 12 Unemployment and Inflation

Chapter 12 Unemployment and Inflation Multiple Choice Questions 1. The origin of the idea of a trade-off between inflation and unemployment was a 1958 article by (a) A.W. Phillips. (b) Edmund Phelps. (c)

### Effects on pensioners from leaving the EU

Effects on pensioners from leaving the EU Summary 1.1 HM Treasury s short-term document presented two scenarios for the immediate impact of leaving the EU on the UK economy: the shock scenario and severe

### INTRODUCTION AGGREGATE DEMAND MACRO EQUILIBRIUM MACRO EQUILIBRIUM THE DESIRED ADJUSTMENT THE DESIRED ADJUSTMENT

Chapter 9 AGGREGATE DEMAND INTRODUCTION The Great Depression was a springboard for the Keynesian approach to economic policy. Keynes asked: What are the components of aggregate demand? What determines

### 7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Key Concepts

Chapter 7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Key Concepts Aggregate Supply The aggregate production function shows that the quantity of real GDP (Y ) supplied depends on the quantity of labor (L ),

### Exchange Rates: Application of Supply and Demand

Exchange Rates: Application of Supply and Demand ECO 120: Global Macroeconomics 1 1.1 Goals Goals ˆ Specific goals: Learn how interpret exchange rates. Learn how to use supply and demand to interpret exchange

### CHAPTER 14 BALANCE-OF-PAYMENTS ADJUSTMENTS UNDER FIXED EXCHANGE RATES

CHAPTER 14 BALANCE-OF-PAYMENTS ADJUSTMENTS UNDER FIXED EXCHANGE RATES MULTIPLE-CHOICE QUESTIONS 1. Which of the following does not represent an automatic adjustment in balance-of-payments disequilibrium?

### 2 0 0 0 E D I T I O N CLEP O F F I C I A L S T U D Y G U I D E. The College Board. College Level Examination Program

2 0 0 0 E D I T I O N CLEP O F F I C I A L S T U D Y G U I D E College Level Examination Program The College Board Principles of Macroeconomics Description of the Examination The Subject Examination in

### Macroeconomics, 10e, Global Edition (Parkin) Chapter 26 The Exchange Rate and the Balance of Payments

Macroeconomics, 10e, Global Edition (Parkin) Chapter 26 The Exchange Rate and the Balance of Payments 1 The Foreign Exchange Market 1) The term "foreign currency" refers to foreign I. coins II. notes III.

### Answers to Text Questions and Problems in Chapter 11

Answers to Text Questions and Problems in Chapter 11 Answers to Review Questions 1. The aggregate demand curve relates aggregate demand (equal to short-run equilibrium output) to inflation. As inflation

### Answers to Text Questions and Problems. Chapter 22. Answers to Review Questions

Answers to Text Questions and Problems Chapter 22 Answers to Review Questions 3. In general, producers of durable goods are affected most by recessions while producers of nondurables (like food) and services

### Exchange Rate Regimes in Mexico since 1954

Exchange Rate Regimes in Mexico since 1954 SEPTEMBER 2009 Disclaimer: This document is not intended to substitute its original version in Spanish for any legal purpose. It is intended solely for guidance

### chapter: Aggregate Demand and Aggregate Supply Krugman/Wells 2009 Worth Publishers 1 of 58

chapter: 12 >> Aggregate Demand and Aggregate Supply Krugman/Wells 2009 Worth Publishers 1 of 58 WHAT YOU WILL LEARN IN THIS CHAPTER How the aggregate demand curve illustrates the relationship between

### 10/7/2013. Chapter 9: Introduction to Economic Fluctuations. Facts about the business cycle. Unemployment. Okun s Law Y Y

Facts about the business cycle Chapter 9: GD growth averages 3 3.5 percent per year over the long run with large fluctuations in the short run. Consumption and investment fluctuate with GD, but consumption

### Reading the balance of payments accounts

Reading the balance of payments accounts The balance of payments refers to both: All the various payments between a country and the rest of the world The particular system of accounting we use to keep