AP Macro Unit 6

appreciation

when the price of a currency increases

depreciation

when the price of a currency decreases

foreign investment

the money invested abroad on currencies based on the value of interest rates

the foreign exchange market

a market where global currencies are traded

the demand for a currency

international buyers, investors, travelers and foreign governments/central banks

the supply of a currency

domestic citizens and domestic government/central bank

current account

that part of the balance of payments recording a nation's exports and imports of goods/services, investment/factor income and transfer payments. Tells whether there is a trade deficit or surplus

financial (capital) account

the part of the balance of payments account in which all long-term flows of payments are listed (financial assets)

trade deficit

when the imports in a country exceed the exports

trade surplus

when the exports in a country exceed the imports

balance of payments

a record of all economic transactions during a given period between residents of one country and residents of the rest of the world

increasing interest rates

increase foreign investment (increases demand for foreign currency & increases supply of domestic currency)

decreasing interest rates

DECREASE foreign investment (decreases demand for foreign currency & decrease supply of domestic currency)

equals zero

Current Account (CA) + Financial Account (FA)

if the capital account has a surplus

then the financial account has a deficit

appreciating currency impact on aggregate demand

AD will shift left due to a decrease in net exports (exports decrease - imports increase)

depreciating currency impact on aggregate demand

AD will shift right due to a increase in net exports (exports increase - imports decrease)

a current account transaction

China selling goods to the U.S.

a financial account transaction

U.S. investors purchase stock in a Chinese firm.

balance of trade

the difference between a country's total exports and total imports

If $1= 20 Pesos, how much would the dollar cost be for U.S. tourist to use the bus in Mexico that costs 12 Pesos round trip?

$0.60 (12 Pesos/20 Pesos)

flexible (floating) exchange rates

arrangement in which the forces of supply and demand are allowed to set the price of various currencies

fixed exchange rates

The official rates of exchange for currencies set by governments; not a dominant mechanism in the international monetary system since 1973.

managed exchange rates (managed float)

a system where the exchange rate is determined by market forces, but the government/Central Bank intervenes from time to time in order to keep it within a certain "band" (= range).

selling bonds (contractionary monetary policy)

decreases the money supply which causes interest rates to increase and currency to appreciate

buying bonds (expansionary monetary policy)

increases the money supply, which causes interest rates to decrease, and currency to depreciate

budget deficit

higher interest rates in the loanable funds which leads to currency appreciation (more foreign investment)

budget surplus

lower interest rates in the loanable funds which leads to currency depreciation (more less investment)

An increase in real income will cause domestic buyers to purchase more...

imports (causes a leftward shift of aggregate demand & decreases the current account)

What happens the value of the Euro if Europeans prefer to vacation in the U.S.?

The Euro Depreciates (Supply curve shifts to the right)