ECON10003 Lecture Notes - Lecture 23: Exchange Rate, Xm Satellite Radio, Floating Exchange Rate

44 views1 pages

amaranthbadger280

19 Jun 2018

School

University of Melbourne

Department

Economics

Course

ECON10003

Professor

Graham Richards

For unlimited access to Class Notes, a Class+ subscription is required.

MACROECONOMICS WEEK 12

Exchange rate adjustment

Consequences of exchange rate movement:

Consequences of depreciation:

-Inflation: lower value of its currency in a country, must give up more of its currency to unit of foreign

currency. Prices of imports of G&S will increase.

i. If imported goods are final the CPI will increase. If they are capital goods PPI will increase. If

intermediate goods, PPI will increase

ii. If imported goods are final capital or intermediate goods, domestic costs of production will increase

and firms may increase prices to maintain profit margins.

iii. Domestic producers of goods, whether final or intermediate, competing with imports, will be able to

raise their prices without losing market share to foreign competitors.

-Increased value of foreign debt and increased debt servicing: foreign debt will increase if AUD depreciated

against foreign currency. There is also interest which has to be paid by the borrower to lender, where the

interest will also increase is the value of the AUD against the foreign currency depreciates. AS interest

payment is recorded as primary income in the current account, both the net primary income balance and

current account balance would worsen other things being equal.

-Possible improvement in trade balance: Australian exports may increase as if AUD depreciates against

foreign currency it is cheaper for the foreign country to buy from Australia. For the same reason, demand for

imports will decrease. If value of exports increases, and value of imports decreases, trade balance will

improve, in terms of the value of each trade and dependent on the elasticity of demand for each. If the demand

for each were inelastic, the value of imports and exports would remain the same.

-A possible increase in net exports: If there is an improvement in the trade balance, there is an increase in net

exports (X – M)- a component of AD. A depreciation of the exchange rate will lead to an increase in AD and

in turn GDP and employment, with consequent reduction in the unemployment rate. If the economy is already

growing rapidly and is close to full employment, the increase in net exports following depreciation may lead

to increased inflation rather than increased output.

-Change in the distribution of income by sector of the economy: if value of exports increases, the income from

the export sector will increase. If imports decrease, domestic demand will switch to the import-competing

sector and income of this sector will increase in terms of profits and wages. To produce more output, more

labour will be employed and increased demand for labour will increase the wage rate in these sectors (at the

expense of Australian consumers). Aus. Consumers will have to pay higher prices for imports and for some

domestically produced goods. As higher prices are being obtained for imports, Aus producers may rise the

price of these goods in Aus.

Fixed or floating exchange rate?

Fixed:

1. Eliminates uncertainty in international transactions. Avoids price changes and unexpected capital gains and

losses due to exchange rate movement. Encourages trade and economic growth.

2. Avoids inflation due to depreciation.

3. Avoids loss of international competitiveness due to appreciation

4. Fixed rate imposes greater accountability on government in the conduct of its economic policy.

Floating:

1. Avoids the problem of deciding the level at which to fix

2. Allows for an independent monetary policy

3. Reduces speculation- as with previous years, fixed exchange rates saw countries prices and costs moving out

of line with competitors as a result of uneven but high rates of inflation.

4. Insulates a country from terms of trade fluctuations due to frequent changes in export commodity prices

find more resources at oneclass.com

Unlock document

This preview shows half of the first page of the document.
Unlock all 1 pages and 3 million more documents.

Already have an account? Log in

Document Summary

Inflation: lower value of its currency in a country, must give up more of its currency to unit of foreign currency. Prices of imports of g&s will increase. i. ii. iii. If imported goods are final the cpi will increase. If they are capital goods ppi will increase. If imported goods are final capital or intermediate goods, domestic costs of production will increase and firms may increase prices to maintain profit margins. Domestic producers of goods, whether final or intermediate, competing with imports, will be able to raise their prices without losing market share to foreign competitors. Increased value of foreign debt and increased debt servicing: foreign debt will increase if aud depreciated against foreign currency. There is also interest which has to be paid by the borrower to lender, where the interest will also increase is the value of the aud against the foreign currency depreciates.

Related Questions

In the short run, a tighter monetary policy by the U.S. Federal Reserve leads to:

Select one:

a. an increase in the supply of dollars and a dollar depreciation.

b. a decrease in the supply of dollars and a dollar appreciation.

c. an increase in the demand for dollars and a dollar depreciation.

d. a decrease in the demand for dollars and a dollar appreciation.

Which theorem states that exchange rates will adjust until the prices of goods in different countries approximate one another?

Select one:

a. purchasing power parity

b. the law of multiple prices

c. the principle of comparative advantage

d. dollarization

A country's balance of trade is the difference between its:

Select one:

a. nominal and real exchange rates.

b. monetary and fiscal policy.

c. exports and imports.

d. capital inflow and capital outflow.

When a foreign business buys stock in a U.S. company, the U.S. capital account will:

Select one:

a. move in a positive direction.

b. move in a negative direction.

c. remain unchanged.

d. become more volatile.

Saying that the United States is running a large current account deficit is equivalent to saying that:

Select one:

a. exports exceed imports in the United States.

b. the United States is running a large capital account surplus.

c. the balance of payments is negative.

d. the value of the current capital stock in the United States exceeds the value of future capital flows.

10-

An increase in the demand for a country's exports will have what effect on its currency?

Select one:

a. Its value will not change.

b. Its value will increase.

c. Its value will decrease.

d. Its value will depreciate.

11-

When the United States has a current account deficit, the U.S. capital account:

Select one:

a. will have a deficit also.

b. will be balanced.

c. will have a surplus.

d. must be falling.

12-

Which of the following is NOT a way that a country can finance a trade deficit?

Select one:

a. increased borrowing

b. sale of assets

c. decreased exports

d. reduction in cash reserves

13-

A trade deficit occurs when the value of a country's:

Select one:

a. imports exceeds the value of its exports.

b. exports exceeds the value of its imports.

c. inflow of foreign capital exceeds the outflow of domestic capital.

d. outflow of domestic capital exceeds its inflow of foreign capital.

14-

Which of the following is a U.S. current account transaction?

Select one:

a. Selling a computer chip to a resident in Europe.

b. Buying stock shares of a Canadian company.

c. Selling U.S. dollars in exchange for euros.

d. A foreign investor's purchase of a manufacturing plant in the United States.

15-

An exchange rate is:

Select one:

a. a yearly summary of all the economic transactions between residents of one country and residents of the rest of the world.

b. the sum of the balance of trade, net income on capital held abroad, and net transfer payments.

c. the price of one currency in terms of another currency.

d. a currency whose value is not pegged but governments will intervene extensively in the market to keep the value within a certain range.

amethysthedgehog627

Economic Questions, if you have time, explain why that's the answer:

7A. Assume the U.S. dollar and the Canadian dollar are traded in flexible currency markets. Which of the following would cause the U.S. dollar to depreciate relative to the Canadian dollar?

A. Higher price level in Canada relative to the United States.

B. Higher interest rates in the United States relative to Canada.

C. Lower interest rates in the United States relative to Canada.

D. Decreasing GDP in the United States than in Canada.

E. Increasing GDP in Canada relative to the United States.

7B. If an exchange rate is said to be floating, that means it is

A, set by the World Bank.

B. set by the government.

C. set by the market forces of supply and demand.

D. set by the International Monetary Fund.

E. set by individual banks.

7C. When the international value of the U.S. dollar increases,

A. Americans pay more for foreign goods.

B. the U.S. trade deficit decreases.

C. U.S. imports decrease.

D. Americans would demand less foreign currency.

E. U.S. exports decrease.

7D. Suppose interest rates fall in the United States, but they donât fall in other nations. What is the impact on the flow of financial capital, the value of the U.S. dollar, and U.S. net exports (based on the changing value of the dollar)?

Capital Flow / Value of the U.S. dollar / Net Exports

A. Inflow / Appreciate / Increase

B. Inflow / Appreciate / Decrease

C. Outflow / Depreciate / Decrease

D. Outflow / Depreciate / Increase

E. Outflow / Appreciate / Decrease

7E. Which of the following would cause the U.S. dollar (USD) to appreciate as compared to the euro?

A. Interest rates in the United States decrease.

B. American consumers prefer to buy European goods.

C. European consumers boycott American goods.

D. GDP in the European Union decreases.

E. GDP in the European Union increases.

8A.

Which of the following would cause the U.S. dollar (USD) to depreciate as compared to the euro?

A. Interest rates in the United States decrease.

B. Interest rates in the European Union decrease.

C. Price levels in the European Union increase.

D. Price levels in the United States decrease.

E. GDP in the European Union increases.

8B. The U.S. dollar is currently trading for 7 pesos per dollar. If the exchange rate adjusts to 10 pesos per dollar then

A. the U.S. dollar has depreciated.

B. the U.S. dollar has appreciated.

C. the Mexican peso has appreciated.

D. both the Mexican peso and the U.S. dollar have appreciated.

E. both the Mexican peso and the U.S. dollar have depreciated.

8C. Suppose the United States and Brazil sign a free trade agreement. If real interest rates increase in the United States but not in Brazil, which of the following will be true of Brazilian capital flow, exports, and the value of the Brazilian real?

Capital Flow / Exports / Value of Brazilian Real

A.Inflow / Increase / Depreciate.

B. Inflow / Decrease / Appreciate.

C. Outflow / Increase / Appreciate.

D. Outflow / Decrease / Appreciate.

E. Outflow / Increase / Depreciate.

8D. Suppose Europeans began purchasing real assets in the United States. How would this impact the foreign exchange market for the euro and the U.S. dollar price of the euro?

Supply of euro / U.S. dollar Price of euro

A. Increase / Increase

B. Increase / Decrease

C. Decrease / Increase

D. Decrease / Decrease

E. Decrease/ Not Change

9. Suppose U.S. consumers decide they like foreign goods better than they like domestic goods. As a result of this change, which of the following is true?

I. The demand for the U.S. dollar will increase.
II. The demand for the U.S. dollar will decrease.
III. U.S. exports will increase as a result of the changing value of the U.S. dollar.
IV. U.S. exports will decrease as a result of the changing value of the U.S. dollar.

A. I only.

B. I and III only.

C. I and IV only.

D. II and IV only.

E. II and III only.

51.The Fed is conducting expansionary monetary policy if it:

A increases the discount rate, buys bonds, and sets a lower target for the federal funds rate.

B decreases the discount rate and sells bonds.

C sets a lower target for the federal funds rate and buys bonds in the open market.

D increases reserve requirements and buys bonds in the open market.

E buys bonds in the open market and raises the discount rate.

52.If banks become concerned about future conditions and decide to hold larger excess reserves, which of the following is a likely result?

A A rise in interest rates

B An increase in bond prices

C An increase in aggregate demand

D An increase in the money supply

E Both C and D

53.The Fed is under no obligation to coordinate its actions with fiscal policy. And in fact, the Fed may take actions specifically designed to counteract some piece of fiscal policy. An example of fiscal and monetary policies with opposite effects is:

A an increase in taxes and increased sales of bonds by the Fed.

B a decrease in government spending and an increase in the discount rate.

C a decrease in taxes and a decrease in the target for the federal funds rate.

D an increase in government spending and an increase in reserve requirements.

E a decrease in taxes and increased purchases of bonds by the Fed.

54.In the fictitious nation of Zagora, a worker can produce either 5 books or 10 televisions in an hour. In neighboring Plovdiv, a worker can produce either 3 books or 5 televisions in an hour. Which statement about this situation is true?

A Zagora has comparative advantage in the production of books.

B Zagora has comparative advantage in the production of televisions.

C Workers in Plovdiv canât possibly compete against the super-productive workers in Zagora.

D Workers in Zagora canât be expected to compete against the low-wage workers in Plovdiv.

E None of the above

55.Given the U.S. has a current account deficit, a large increase in the demand for U.S. computer programs among Japanese residents will have all the following effects except:

A an increase in the exchange rate, expressed in yen per dollar.

B an increase in the U.S. capital account surplus.

C an increase in investment in Japan.

D an decrease in the U.S. trade deficit.

E It may have all the above effects.

56.Fiscal policy affects exchange rates because:

A as government spending increases, the government must buy more and more goods and services from foreign countries.

B as government debt increases, interest rates rise, and the value of the currency rises.

C as government debt increases, interest rates rise, and the value of the currency falls.

D as the money supply increases, interest rates fall, and the value of the currency rises.

E as the money supply increases, interest rates fall, and the value of the currency falls.

57.There are many kinds of trade restrictions, and trade restrictions are put into place for many reasons. Which of the following is not a reason to use trade restrictions?

A To save natural habitats from over-use

B To protect the jobs of workers in certain industries

C To make a political statement regarding the labor policies of another nation

D To compensate for higher taxes placed on domestic producers

E To create a lower prices for domestic consumers

58.If the value of the U.S. dollar in foreign exchange markets rises:

A U.S. exports will become relatively less expensive.

B capital inflows into the United States will increase.

C people in the U.S. will purchase fewer imports.

D U.S. exports will likely decrease.

E All of the above

59.Saying that leakages equal injections give the equation:

A T + S + X = G + I + M

B Y = C + S + T

C Y = C + I + G + X - M

D T + S + M = C + G + I + X

E T + S + M = G + I + X

harlequinleopard136

ECON10003 Lecture Notes - Lecture 23: Exchange Rate, Xm Satellite Radio, Floating Exchange Rate

Document Summary

Get access

Related Documents

ECON10003 Lecture Notes - Lecture 3: Nominal Interest Rate, Real Interest Rate, National Accounts

ECON10003 : ECON10003 - Introductory Macroeconomics Course Summary

ECON10003 Lecture Notes - Lecture 21: Big Mac Index, The Foreign Exchange, Real Interest Rate

Related Questions