Foreign exchange U7 AP Macro

Whatever direction demand goes in, supply of the opposite currency will go in the ___ direction

same

When it asks about QS, look at supply or demand?

demand

When it asks about QD, look at supply or demand?

supply

What are the four determinants?

-Taste'

-Income

-Price

-Interest rates

BONUS: The fifth hidden one is expectations, but only when its explicit that it is expected

Explain taste determinant

-When g/s become more desirable, D↑ for that country’s currency

-When g/s become less desirable, D ↓ for that country’s currency

What happens when income increases?

-more people have more money to spend in the “other country”

-D for other currency ↑

What happens when income decreases?

-People have less income to spend in “other country”

-D for other currency ↓

When does income increase?

-GDP ↑

-Economic growth ↑

-Employment ↑

-Output ↑

When does income decrease?

-GDP ↓

-Economic growth ↓

-Employment ↓

-Output ↓

-Recession ↓

What happens when interest rates ↑

-Bond mkt becomes more lucrative

-D↑ for bonds

-D↑ for currency

What happens when interest rates ↓

-Bond mkt becomes less lucrative

-D↓ for bonds,

-D ↓ for currency

What happens when there is inflation

-P↑

-g/s become more expensive, thus making them less desirable. D ↓ for currency

What happens when there is deflation?

P ↓

-g/s are cheaper here and more expensive, causing D↑ for currency

What is the formula for talking about value of currency?

Due to ____ (determin), ____ (country 1) buys ____ (more/less) from ____ (country 2)

-D

-S

-Graph

What does balance of payments track?

Money coming in and out

How does money come IN

Through exports and other nations buying our bonds

How does money come OUT

through imports and us buying international bonds

What are the two main accounts,

-Current account

-Capital and financial account

What is another term for current account

Net exports

What is another word for capital and financial account

Bond market

What does the balance of payments equal

zero

What does current account include

-exports

-imports

Xn= X-M

When net exports ↑, what happens to current account?

current account ↑

When net exports ↓, what happens to current account

Current account ↓

What is the capital and financial account another word for

the bond market

What is the equation for capital flows

Cap. flows= Inflows-outflows

What are inflows

Money coming in to the US bond mkt

what are outflows

money coming out of the us bond mkt to buy foreign bonds

What is the direct impact in BOP questions?

-What immediately happens to current account or financial account

What is the indirect impact for BOP questions?

What happens after the direct impact

-The BOP returns to zero

How do you answer questions about the balance of payments for questions on current account?

1: restate prompt

2: what happens to imports/exports

3: What happens to Net exports

4: What happens to current account

4: What happens to balance of payments

How do you answer questions about the balance of payments for questions on capital and financial account?

: restate prompt, what happens to bond mkt

2: what happens to capital inflows/outflows

3: What happens to capital flows

4: What happens to capital and financial account

4: What happens to balance of payments

When Current account or capital and financial account ↑ , there is a

surplus

When Current account or capital and financial account ↓ , there is a

deficit

If current account ↑ then cap account will always…

↓

THERE IS A BALANCE

In the long run, what is happening to the balance of payments?

it is increasing

In easy money policy, what happens to int. rates

Lower int. ratesI

In easy money policy, what OMO is there

buying securities

What happens when the fed buys securities or lowers int. rates

-Slf ↑ , Real i ↓

IF CB LENDS….

-Sm ↑, nominal i ↓

-I ↓, Ig ↑

-Ig x mult= ↑ AD, ↑ POE

What happens to int rates in tight money policy

Int. rates ↑

What OMO is tight money policy

Selling securities

What happens if int rates ↑ or fed sells securities

-Slf ↓, real i ↑

IF BANKS LEND…

-Sm ↓, nom i ↑

-I ↑ , Ig ↓

-Ig x mult = ↓ AD, ↓ POE