Chapter 15: Open Economy, International Trade, and Finance

Liquidity trap

when demand for money is flat → change in money supply does not affect interest rates.

Arbitrage

buying low, selling high → profit.

Depreciation

currency becomes weaker /loses value compared to other currencies.

Appreciation

currency gains value compared to other currencies.

Trade deficit

when imports exceed exports.

Fixed exchange rate

changes in demand only affect quantity of dollars purchased.

Balance of payments

statement of all international flows of money during a period of time

Trade surplus

when exports exceed imports

Flexible exchange rate

central bank can fix quantity of assets denominated in home currency

Velocity of money (V)

number of times per period that average dollar is spent on final goods and services

Quantity of money

Q is stable in addition to V

Neutral rate of real interest

fluctuations in nominal interest rate reflect anticipated inflation

Fisher effect

market participants predicted Fed will reduce money supply growth to counter inflation → causes inflation and nominal interest rates to fall