Chapter 26 - Exchange rates, international trade & capital flows
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43 Terms
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power parity
Purchasing ________ (PPP): theory that nominal exchange rates are deter mined as necessary for the law of one price to hold.
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U.S.
________ households and firms supply dollars to the foreign exchange market to acquire foreign currencies, which they need to purchase foreign goods, services, and assets.
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Appreciation
________: increase in the value of a currency relative to other currencies.
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Depreciation
________: decrease in the value of a currency relative to other currencies.
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Trade deficit
________: when imports exceed exports, the difference between the value of a country's imports and the value of its exports in a given period.
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tight monetary policy
A(n) ________ raises the real interest rate, increasing the demand for dollars, reducing the supply of dollars, and strengthening the dollar.
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Trade
________ balance= net exports: value of a country's exports less the value of its imports in a particular period (quarter or year)
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Nominal exchange rate
________: rate at which two currencies can be traded for each other.
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Trade surplus
________: when exports exceed imports, the difference between the value of a country's exports and the value of its imports in a given period.
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Capital inflows
________: purchases of domestic assets by foreign households and firms.
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Nominal exchange rate
rate at which two currencies can be traded for each other
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Appreciation
increase in the value of a currency relative to other currencies
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Depreciation
decrease in the value of a currency relative to other currencies
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Flexible exchange rate
exchange rate whose value is not officially fixed but varies according to the supply and demand for the currency in the foreign exchange market
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Foreign exchange market
market on which currencies of various nations are traded for one another
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Fixed exchange rate
exchange rate whose value is set by official government policy
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Market equilibrium value of the exchange rate
exchange rate that equates the quantities of the currency supplied and demanded in the foreign exchange market
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Real exchange rate
price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency
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Law of one price
if transportation costs are relatively small, the price of an internationally traded commodity must be the same in all locations
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Purchasing power parity (PPP)
theory that nominal exchange rates are deter mined as necessary for the law of one price to hold
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Trade balance = net exports
value of a country's exports less the value of its imports in a particular period (quarter or year)
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Trade surplus
when exports exceed imports, the difference between the value of a country's exports and the value of its imports in a given period
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Trade deficit
when imports exceed exports, the difference between the value of a country's imports and the value of its exports in a given period
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International capital flows
purchases/sales of real and financial assets across international borders
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Capital inflows
purchases of domestic assets by foreign households and firms
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Capital outflows
purchases of foreign assets by domestic households and firms
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Net capital inflows
capital inflows minus capital outflows
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Nominal exchange at rate
Rate at which two currencies can be traded for each other
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Appreciation
Increase in the value of a currency relative to other currencies
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Depreciation
Decrease in the value of a currency relative to other currencies
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Flexible exchange rate
Exchange rate whose value is not officially fixed but varies according to the supply and demand for the currency in the foreign exchange market
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Foreign exchange market
Market on which currencies of various nations are traded for one another
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Fixed exchange rate
Exchange rate whose value is set by official government policy
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Real exchange rate
Price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency
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Law of one price
If transportation costs are relatively small, the price of an internationally traded commodity must be the same in all locations
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Purchasing power parity (PPP)
Theory that nominal exchange rates are deter mined as necessary for the law of one price to hold
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Trade balance = net exports
Value of a country's exports less the value of its imports in a particular period (quarter or year)
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Trade surplus
When exports exceed imports, the difference between the value of a country's
exports and the value of its imports in a given period
exports and the value of its imports in a given period
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Trade deficit
When imports exceed exports, the difference between the value of a country's
imports and the value of its exports in a given period
imports and the value of its exports in a given period
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International capital flows
Purchases/sales of real and financial assets across international borders
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Capital inflows
Purchases of domestic assets by foreign households and firms
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Capital outflows
Purchases of foreign assets by domestic households and firms
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Net capital inflows
Capital inflows minus capital outflows