ECON 2 Lecture Notes - Lecture 19: Real Interest Rate, Microsoft Powerpoint, Purchasing Power Parity

119 views2 pages

Verified Note

whitemarten979

12 Mar 2019

School

Department

Course

Professor

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

ECON 2 verified notes

19/19View all

ECON 2 Lecture 1: ECON 2 Lecture 1

ECON 2 Lecture Notes - Lecture 2: Absolute Advantage, Comparative Advantage, Opportunity Cost

ECON 2 Lecture Notes - Lecture 19: Real Interest Rate, Microsoft Powerpoint, Purchasing Power Parity

Document Summary

Econ 2 lecture 19: trade and exchange rates continued. Today"s lecture was a continuation of the powerpoint, which i already completely covered in the last lecture notes. So here is the relevant section to today"s lecture. In an open economy, the equation for gdp is. Y = c + i + g + (x - m) (gdp, private consumption, investment, government spending, exports, and imports respectively) Net exports: nx = (x - m) Let"s assume that nx is positive, and we sold some goods to japan for 1000 yen. Keep it, so the yen acts as a japanese asset. Buy stock in a japanese company (invest) Exchange it for usd (now the bank has to figure out what to do with the yen) Buy 1000 yen of japanese goods (increasing imports, which brings nx down to 0) Nominal exchange rate: the rate at which two currencies can be traded for each other. Exchange rates can either be flexible or fixed.

Related Questions

Please read the passage and answer the questions below.

During the first half of the 2000s, the Japanese yen was relatively weak against the U.S. dollar. This was a boon for Japanâs export-led economy. On January 1, 2008, it took 122 yen to buy one U.S. dollar. For the next four years, the yen strengthened relentlessly against the dollar, hitting a record high of Â¥75.31 to the dollar on October 31, 2011. The reasons for the rise of the yen were complex and had little to do with the strength of the Japanese economy because there has been very little of that in evidence. The weakness of the yen during the early to mid-2000s was due to the so-called carry trade. This financial strategy involved borrowing in Japanese yen, where interest rates were close to zero, and investing the loans in higher-yielding assets, typically U.S. Treasury bills, which carried interest rates 3 to 4 percentage points greater. Investors made profits from the interest rate differential. At its peak, financial institutions had more than a trillion dollars invested in the carry trade. Because the strategy involved selling borrowed yen to purchase dollar-denominated assets, it drove the value of the yen lower. The interest rate differential existed because the Japanese economy was weak, prices were falling, and the Bank of Japan had been lowering interest rates in an attempt to boost growth and get Japan out of a dangerous deflationary cycle. When the global financial crisis hit in 2008 and 2009, the Federal Reserve in the United States responded by injecting liquidity into battered financial markets, effectively lowering U.S. interest rates on U.S. Treasury bonds. As these fell, the interest rate differential between Japanese and U.S. assets narrowed sharply, and the carry trade became unprofitable. Financial institutions unwound their positions, selling dollar-denominated assets, and buying yen to pay back their original loans. The increased demand drove up the value of the yen. For Japanese exporters, the 40 percent increase in the value of the yen against the dollar (and the euro) between early 2008 and 2012 was a painful experience. A strong yen hurts the price competitiveness of Japanese exports and reduces the value of profits earned overseas when translated back into yen. Take Toyota as an example: In February 2012, the company stated that its profit for the year ending March 31, 2012, would be about Â¥200 billion, 51 percent lower than in the prior year. Toyota makes nearly half of the cars it sells globally at its Japanese plants, so it has been particularly hard hit by a rise in the value of the yen. In late 2012, things started to change when the pro-business Liberal Democratic Party won national elections and Shinzo Abe was appointed prime minister. Abe had campaigned on a platform that included taking actions to weaken the value of the yen to help Japanâs exporters. Even before the election, Japanâs central bank had accelerated purchases of government securities, thereby expanding the money supply, and had agreed to a higher inflation target. Under Abeâs leadership, this policy had explicit government support. One consequence of the policy was to reduce the value of the yen against other currencies. Indeed, between October 2012 and December 2013, the yen lost more than 25 percent of its value against the U.S. dollar. The yen was trading at Â¥104 to the U.S. dollar in late December 2013. While this helped Japanâs exporters, the policy was criticized by other major industrial nations as a unilateral action that came dangerously close to precipitating a currency war.

1. Who in Japan benefits from the devaluation of the yen? Who does this hurt in Japan?

2. What does this case teach you about the way foreign exchange markets work?

harlequindolphin819

A. In a small open economy in a flexible exchange rate system with perfect capital mobility, there is complete ________ crowding-out of ________ policy.

a) domestic, monetary

b) domestic, fiscal

c) international, fiscal

d) international, monetary

B. If the dollar depreciates against the yen, this tends to ________ our imports of Japanese goods and ________ our exports of goods to Japan, so that our net exports ________.

a) decrease, decrease, decrease

b) increase, decrease, are unchanged

c) decrease, increase, increase

d) decrease, increase, are unchanged

E) increase, increase, increase

C. An increase in the nominal money supply will shift

a) AD up and raise the price level.

b) SAS down and lower the price level.

c) SAS up and raise the price level.

d) AD down and lower the price level.

D. A rise in the price level causes

a) movement down along an LM curve.

b) movement up along an LM curve.

c) the LM curve to shift downward.

d) the LM curve to shift upward.

plumminnow211

Country Snapshots: Download the file snapshots.pdf from www.stanford.edu/~chadj/snapshots.html and answer the following. (At the moment, the latest year in the data file is 2010. Over time, this year will advance, so please use the latest year available in the Country Snapshots file whenever the year 2010 appears in questions below.)

(a) What was the ratio of per capita income in each of the following countries to that in the united states in the year 2010: Ethiopia, Mexico, India, and Japan?

(b) Which country had the faster average annual growth rate of per capita GDP between 1960 and 2010, Botswana or China?

(d) Which is larger as a share of GDP in most rich countries, investment or government purchases? What about in the poorest country?

(e) Exchange rates are reported as units of domestic currency (like the Japanese yen or British pound) per the US. dollar. Look at the exchange rate for several countries. Do you detect any overall pattern? Why might that be?

yellowmuskrat919

ECON 2 Lecture Notes - Lecture 19: Real Interest Rate, Microsoft Powerpoint, Purchasing Power Parity

ECON 2 Lecture 1: ECON 2 Lecture 1

ECON 2 Lecture Notes - Lecture 2: Absolute Advantage, Comparative Advantage, Opportunity Cost

ECON 2 Lecture Notes - Lecture 19: Real Interest Rate, Microsoft Powerpoint, Purchasing Power Parity

Document Summary

Get access

Related Documents

ECON 2 Chapter Notes - Chapter 20: Financial Institution, Nominal Rigidity, Investment Banking

ECON 2 Chapter Notes - Chapter 17: Loanable Funds, Menu Cost, Fallacy

ECON 2305 Study Guide - Midterm Guide: Exchange Rate, Foreign Direct Investment, Capital Outflow

Related Questions