All Flashcards
What is the impact of expansionary monetary policy on net exports?
It causes the currency to depreciate, increasing net exports.
What is the impact of contractionary monetary policy on net exports?
It causes the currency to appreciate, decreasing net exports.
How does a decrease in interest rates affect capital flows?
It leads to capital flight, as investors seek higher returns elsewhere.
How does an increase in interest rates affect capital flows?
It attracts capital inflows, as investors seek higher returns.
What is the effect of a tariff on the exchange rate?
Tariffs can increase demand for domestic currency, leading to appreciation.
How does government intervention in the FOREX market affect exchange rates?
It can stabilize exchange rates or manipulate them to achieve policy goals.
What is the impact of a quota on the exchange rate?
Quotas can increase demand for domestic currency, leading to appreciation.
How does a central bank buying its own currency affect the exchange rate?
It increases demand for the currency, causing it to appreciate.
How does a central bank selling its own currency affect the exchange rate?
It increases the supply of the currency, causing it to depreciate.
What is the effect of a subsidy on exports on the exchange rate?
Subsidies can increase supply for foreign currency, leading to depreciation of domestic currency.
What does a rightward shift in the demand curve for a currency indicate?
An increase in demand for that currency, leading to appreciation.
What does a rightward shift in the supply curve for a currency indicate?
An increase in the supply of that currency, leading to depreciation.
On a FOREX graph, what is on the vertical axis?
The price of the currency (exchange rate).
On a FOREX graph, what is on the horizontal axis?
The quantity of the currency.
How is the equilibrium exchange rate determined on a FOREX graph?
It's the intersection of the supply and demand curves.
What happens to the equilibrium exchange rate when demand increases?
The exchange rate increases (currency appreciates).
What happens to the equilibrium exchange rate when supply increases?
The exchange rate decreases (currency depreciates).
Show the effect of an increase in demand for Japanese goods by U.S. consumers on a graph of the foreign exchange market for the U.S. dollar.
The demand curve for dollars shifts to the left.
Show the effect of the Federal Reserve increasing the money supply on a graph of the foreign exchange market for the U.S. dollar.
The supply curve for dollars shifts to the right.
What does the slope of the demand curve for a currency represent?
The inverse relationship between the exchange rate and the quantity of currency demanded.
What is the difference between currency appreciation and depreciation?
Appreciation is an increase in value, while depreciation is a decrease in value.
Differentiate between nominal and real exchange rates.
Nominal is the rate at which currencies are traded. Real adjusts for price level differences.
What is the difference between capital investment and financial investment?
Capital investment is spending on physical assets; financial investment is buying financial assets.
Compare the effects of increased demand for exports vs. increased demand for imports on a country's currency.
Increased export demand appreciates the currency; increased import demand depreciates it.
Compare expansionary and contractionary monetary policy effects on interest rates.
Expansionary policy lowers interest rates; contractionary policy raises them.
Compare the effects of higher domestic vs. higher foreign interest rates on a country's currency.
Higher domestic rates appreciate the currency; higher foreign rates depreciate it.
What is the difference between a floating and a fixed exchange rate?
Floating rates are determined by market forces; fixed rates are set by the government.
Compare the impact of a tariff and a quota on imports.
Tariffs generate revenue for the government, while quotas do not.
Compare the short-run and long-run effects of expansionary monetary policy on the exchange rate.
Short-run depreciation, long-run potential appreciation due to inflation.
Contrast the effects of an increase in demand for a country's goods with an increase in its money supply on the exchange rate.
Increased demand appreciates the currency; increased money supply depreciates it.