ECO3200 Chap 13

Balance of payments

The records of the transactions of residents of a country with the rest of the world.

Current account

Account that includes trade in goods and services and transfer payments.

Capital account

Account that involves purchases and sales of assets, such as bonds and stocks.

Exchange rate

The price of one currency in terms of another currency.

Fixed exchange rate system

A system where foreign central banks buy and sell currencies at fixed prices.

Floating exchange rate system

A system where exchange rates are allowed to adjust according to supply and demand.

Purchasing power parity (PPP)

A condition where currencies are equal in purchasing power for a basket of goods.

Net exports

The excess of exports over imports, calculated as X-Q.

Marginal propensity to import

The fraction of an extra dollar of income spent on imports.

Expansionary Monetary Policy

A policy that decreases interest rates to stimulate borrowing and spending, increasing aggregate demand.

Contractionary Monetary Policy

A policy that increases interest rates to curb borrowing and spending, decreasing aggregate demand.

Real exchange rate

The exchange rate adjusted for price level differences between countries.

IS curve

A curve that represents the relationship between interest rates and output in the goods market.

Capital mobility

The ability of capital to move freely across borders in search of higher returns.

Nominal exchange rate

The quoted price of one currency compared to another in current terms.

Deficit

A situation where expenses exceed income, needing financing through borrowing or selling assets.