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Chapter 13

National Income Accounts



Saving:

o If , there is an outflow of investment
Foreign assets accumulate
Imports are less than exports
Balance of payment
o
Foreign account is the flow of assets
Official reserve assets, other assets, statistical discrepancy
It is made of the financial account and the net of the reserve change


o Solutions to solving the balance of payment gap
Finance the debt, fix economic policies, default on the debt
Chapter 14
Forex demand and exchange rates:


Arbitrage has been eliminated due to telecommunications
Forex equilibrium
o When selling dollars for euros, the euro appreciates until the exchange
rate equals the rate of return
o Expected depreciation:


o Interest Parity Condition:


All currencies are equally
desirable
Change in interest rate: If
people switch to , sell $ and
buy , $ value depreciates,
and
Change in

: If

, causes

, switch to $, buy $
and sell ,
Chapter 15
Money is a medium of exchange (eliminates informational needs, and the
problem of wants) and a unit of account goods are determined in terms of
their monetary value) and a store of value
Government facilitates monetary system by taxing in currency
Liquid assets have small interest, illiquid have high interest
Money Markets and Interest Rates
Money demand is determined by interest rates, liquidity, and risk
o Inversely related to the interest rate


Money supply is determined by the Central Bank
Inflated interest rates
o At ,

, therefore more money is being held than demanded,


money is lent out and made available,
If the Fed increases supply
o At

, therefore banks lend more and



o At ,

therefore bonds are sold for currency and



In short run , prices dont adjust

Overshooting occurs when monetary policy has immediate effect
on interest rates but not on prices
o In long run:


Chapter 16
Exchange rates in the long run
Law of one price states prices are equal
Purchasing power parity
o


Expected appreciation and interest rates
o


o When inflation occurs, the exchange rate must change to meet changing
purchasing power
Monetary approach


PPP Theory of exchange rates in the
long run
Shortcomings of PPP
- no data support
-law of one price does
not hold
-trade barriers
-imperfect competition
-different measures
o


Fischer Effect
o Interest rates should move together with inflation
o


o In the long run, real interest rates must be equal
Long Run Interest Rate Model
Real exchange rate approach
o


o If absolute PPP holds then
o If relative PPP holds then
Relative demand and supply for goods
Relative demand for US goods increases, relative

and
Relative output supply of US goods increases, relative

and


o



o
Balassa Samuelson Effect
o Relative price rise as a country becomes richer and nominal inflation will
increase
o Prices in tradeables and non-tradeables , demand for non-tradeables ,
and appreciation occurs
o Productivity gains occur in the tradeable sector
Import quotas/tariffs
o
Chapter 17
Output, interest rates, and exchange rates
Determinates of aggregate demand


Output (actual spending) and aggregate demand (planned spending

IS, AS, LM, AA curves



AD/IS shifts right
o
o
o


AA/LM shifts right
o
o

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