Chapter 19: Open-Economy Macroeconomics
The ________________________ between two countries’ currencies is the nominal exchange rate at which a given basket of goods and services would cost the same amount in each country. (3)
Purchasing Power Parity
An _______________________ is a rule governing policy toward the exchange rate. (3)
Exchange Rate Regime
A country has a _________________ when the government keeps the exchange rate against some other currency at or near a particular target. (3)
What does this do to the fed?
What are the advantages & disadvantages
Advantage
Disadvantage
Fixed Exchange Rate
(fed would be restricted using monetary policy)
(fed would be restricted using monetary policy)
ADV: lowers uncertainty about the future value of the currency
DIS: Lowers the feds ability to use Monetary Policy
A country has a _____________________ when the government lets the exchange rate go wherever the market takes it. (3)
What does this do to the fed?
What are the advantages & disadvantages
Advantage
Disadvantage
Floating Exchange Rate
(the fed would be flexible)
(the fed would be flexible)
ADV: Increases the feds ability to use Monetary Policy
Disadvantage:: Increases uncertainty about the future value of the currency.
1944, representatives of allied nations met in Bretton Woods, to establish Post War international monetary system of fixed exchange rate among currencies and this was broken down in 1971
in 1971 -> broke down and moved to a floating exchange rate
Government purchases or sales of currency in the foreign exchange market are ___________________(3)
Exchange Market Interventions
_______________________ are stocks of foreign currency that governments maintain to buy their own currency on the foreign exchange market (3)
Foreign Exchange Reserves
_____________________ are licensing systems that limit the right of individuals to buy foreign currency. (3)
Foreign Exchange Controls
Exchange rate policy poses a dilemma: there are economic pay offs to stable exchange rates, but the policies used to fix the exchange rate have costs.
a
Exchange market intervention requires large reserves, and exchange controls distort incentives.
a
If monetary policy is used to help fix the exchange rate, it isn’t available to use for domestic policy
a
A ___________ is a reduction in the value of a currency that previously had a fixed exchange rate
Devaluation
A __________ is an increase in the value of a currency that previously had a fixed exchange rate.
Revaluation
Under floating exchange rates, expansionary monetary policy works in part through the exchange rate: cutting domestic interest rates leads to a depreciation, and through that to higher exports and lower imports, which increases aggregate demand
Floating Exchange Rates
Contractionary monetary policy has the reverse effect.
GDP=
Consumption + Investment spending + G +(Exports – Imports)
International Business Cycles:
The fact that one country’s imports are another country’s exports creates a link between the business cycle in different countries
The fact that one country’s imports are another country’s exports creates a link between the business cycle in different countries
Floating exchange rates, however, may reduce the strength of that link
a
Whenever interest rate goes down the currency depreciates
When the interest rate goes up the currency appreciates
Open-economy macroeconomics is the branch of economics that deals with
the relationships between economies of different nations
2.Economists summarize a country’s transactions with