ECON 333 Final exam

foreign direct investment FDI

When a firm establishes production processes in another country

Multi Enterprises

Has a home country where its headquarters are located, but undertakes operations around the world

vertical FDI

Firms locate difference, stages of production in different countries motivated by comparative advantage

Horizontal FDI

Firm slow, the same production activity in different countries motivated by market seeking

Portfolio Investment

When investors in the home country acquire marketable stocks or bonds in a foreign country

Bank loans

Giving up money today for a promise by the borrower to pay in the future

Type of asset purchase

Games from trade

The lower interest rate will benefit borrowers, but hurt savers

Supply curve slopes upwards because

A increase in interest rate encourages saving

Demand curved slopes down because

A decrease in interest rate encourages borrowing

Consumption smoothing

Save in good times, borrow in bad times

Increase in consumption will

Increase and individuals utility but the gain in utility is less than the decrease in utility

Diversification of risk

Offset domestic shocks with foreign investment

Diversification will decrease risk if

The returns in the home country and the rest of the world are not perfectly correlated

Production efficiencies

Foreign direct investment can lower transportation and other business costs

Exchange rate

The price of one currency in terms of another

Increase means

A dollar depreciation

Spot rate

Current exchange rate

Forward exchange rate

Arbitrage

Exploding post differences in different markets

Buying glow selling high

Cross Rate

Used to exchange, lesser used currencies

Law one price

Goods cost the same one expressed in the same currency everywhere in the world

Demand curve reflect

Domestic purchases of foreign goods and services and foreign assets

The supply curve reflects

Foreign purchases of domestic goods and services and domestic assets

Nominal (E)

The price of one current in terms of another

Real (q)

Cost of living in one country divided by the cost of living at another

PPP assumes

The cost of living is the same error when expressed in the same currency

q=1

Relative PPP assumes

That the real exchange rate is constant overtime

PPP produce a relationship between the

Exchange rate and price level into a countries

Relative PPP predict a relationship between the

Growth in the exchange rate in the growth of the price level (inflation)

The growth of the exchange rate is

Equal to the inflation to differential

Quantity theory of money

Is a macroeconomic degree explaining the determination of price level in the long run

A relationship between the money supply and the price level

Relative PPP

Makes a prediction about the change and exchange rate

A weaker assumption then PPP

Current account surplus

Countries spending less than its income

Current account deficit

Country is spending more than its income

Financial account

Measures asset sales in bowing between the countries

Asset sales and borrowing are both measured as a positive

Exchange market intervention

Sell foreign currency reserves to buy them

Interest rate policy

Raise interest rate

Exchange controls

Restrict domestic citizens purchases of foreign currency

Advantages of fixed rates

Exchange rates stability promotes a trade and investment

Same inflation rate as base country

Avoid problems of liability dollarization

Disadvantages of fixed rates

No independent monetarily policy

Must copy the interest rate policy of the base country

Unable to use monetary policy to respond to recessions or national emergency such as war or financial crisis

Vulnerability to exchange rate crisis

Magnify the effects of foreign shocks on domestic output-flexible rates act as shock absorbers

Cost foreign exchange reserves

Gold standard

A fixed a change rate system collapse in the 1930s due to in flexibility

Bretton Wood system

Exchange rates fixed to the dollar, dollar fixed to gold collapsed in the 1970s

The euro

Effect exchange rate system of the countries and the euro zone

Pros of the euro

Decrease transaction cost increased transparency

Cons of the

Individual countries lose monetary independence

Nominal anchor

a key economic variable (like the exchange rate, money supply, or inflation rate itself) that a central bank targets to stabilize prices, guide monetary policy, and manage inflation expectations by linking the value of domestic money to something stable, preventing runaway price increases and fostering economic predictability.

Liability dollarization

an economic condition where a country's firms, households, or banks borrow in a foreign currency (most often the U.S. dollar, but also the euro, yen, etc.) but generate their income or hold their assets in the domestic currency. 

Dutch disease

the economic problems that arise when a country's currency strengthens sharply, often due to a resource boom, making other export sectors less competitive and weakening long-term growth.

Home bias

the investors in a large country show a particularly strong home bias, they will claim a large share of stocks from their home country for themselves.

Capital controls

government-imposed limits (taxes, quotas, bans) on money flowing in/out of a country, used to stabilize exchange rates, manage financial crises, protect reserves, or gain monetary policy independence from external pressures, t

Monetary policy

actions by a central bank to manage the money supply and interest rates to achieve macroeconomic goals like controlling inflation and promoting employment