Foreign Exchange (FOREX)
- the buying and selling of currency
*example: in order to purchase souvenirs in France, it is first necessary for Americans to sell their dollars and buy Euros
- any transactions that occurs in the balance of payments necessitates foreign exchange
-Exchange Rate (e) is determined in foreign currency markets
Changes in Exchange Rates
-exchange rates (e) are a function of supply and demand for currency
+an increase in the supply of a currency
+a decrease in supply of a currency will increase the exchange rate of currency
+increase in demand for currency will increase the exchange rate of currency
+decrease in demand for a currency will decrease the exchange rate of currency
Appreciation and Depreciation
-appreciation of currency occurs when exchange rate of that currency increases (e^)
-depreciation of a currency occurs when the exchange rate of that currency decreases
Exchange Rate Determinants
-consumer tastes
-relative income
-relative price level
-speculation
Exports and Imports
-exchange rate is a determinant of both exports and imports
-appreciation of the dollar causes american goods to be relatively more expensive and foreign goods to be relatively cheaper, thus reducing exports and increasing imports
-depreciation of the dollar causes american goods to be relatively cheaper and foreign goods to be relatively more expensive thus increasing exports and reducing imports
Thursday, April 28, 2016
Unit 7 The Balance of Payments
-measure of money inflows and outflows between the US and the Rest of the World (ROW)
+inflows are referred to as CREDITS
+out flows are referred to as DEBITS
-the balance of payments is divided by 3 accounts
1. current account
2. capital/ financial accounts
3. official reserves accounts
Current Accounts
- balance of trade or net exports
-net foreign income
-net transfers (tend to be unilateral)
Capital/ Financial Accounts
- the balance of capital ownership
-includes the purchase of both real and financial assets
-direct investment in the US is a credit to the capital account
-direct investment by US Firms/ individuals in foreign country are debits to capital accounts
-purchase of foreign financial assets represents a debit to a capital account
-purchase of domestic financial assets by foreigners represents a credit to the capital accounts
***the current account and the capital account should zero each other out***
Official Reserves
-foreign currency holdings of US Federal Reserve System
-when there is a balance of payments surplus the FED accumulates foreign currency and debits balance of payments
-when there is a balance of payments deficit FED depletes its reserves of foreign currency and credits balance of payments
Active US passive official reserves
-the US is passive in its use of official reserves
+inflows are referred to as CREDITS
+out flows are referred to as DEBITS
-the balance of payments is divided by 3 accounts
1. current account
2. capital/ financial accounts
3. official reserves accounts
Current Accounts
- balance of trade or net exports
-net foreign income
-net transfers (tend to be unilateral)
Capital/ Financial Accounts
- the balance of capital ownership
-includes the purchase of both real and financial assets
-direct investment in the US is a credit to the capital account
-direct investment by US Firms/ individuals in foreign country are debits to capital accounts
-purchase of foreign financial assets represents a debit to a capital account
-purchase of domestic financial assets by foreigners represents a credit to the capital accounts
***the current account and the capital account should zero each other out***
Official Reserves
-foreign currency holdings of US Federal Reserve System
-when there is a balance of payments surplus the FED accumulates foreign currency and debits balance of payments
-when there is a balance of payments deficit FED depletes its reserves of foreign currency and credits balance of payments
Active US passive official reserves
-the US is passive in its use of official reserves
Friday, April 8, 2016
Unit 5-Extending the Analysis of Aggregate Supply
Short run aggregate supply-
-this is the period in which wages (and other input prices) remain fixed as price level increase or decrease.
long run aggregate supply-
-period of time in which wages have become fully responsive to changes in price level.
****Remember how crucial worker salaries o a businesses out out and bottom line when considering effects on aggregate supply******
effects over short run-
-in the short run , price level changes allow for companies to exceed normal out puts and hire more workers because profits are increasing while wages remain constant.
-in the long run , wages will adjust to the price level and previous output level will adjust accordingly.
equilibrium in the extended model-
-the extended model means that both the short run and long run AS curves.
- the long AS curves is represented with a vertical line at full employment level of real GDP.
Demand pull inflation in the AS model-
- demand pulls (to the right) which causes prices to increase based on increase in aggregate demand.
-in the short run , demand pull will drive up prices , and increase production
-in the long run, increase in aggregate demand will eventually return to previous levels.
Cost push and the extended model-
-cost push (to the left) arises from factors that will increase per unit costs such as increase in the price of a key resource.
dilemma for the government-
-in and effort to fight cost push, the government can react in 2 different ways:
1. action such as spending by the government could begin an inflationary spiral.
2. no action however could lead to recession by keeping production and employment levels declining.
-this is the period in which wages (and other input prices) remain fixed as price level increase or decrease.
long run aggregate supply-
-period of time in which wages have become fully responsive to changes in price level.
****Remember how crucial worker salaries o a businesses out out and bottom line when considering effects on aggregate supply******
effects over short run-
-in the short run , price level changes allow for companies to exceed normal out puts and hire more workers because profits are increasing while wages remain constant.
-in the long run , wages will adjust to the price level and previous output level will adjust accordingly.
equilibrium in the extended model-
-the extended model means that both the short run and long run AS curves.
- the long AS curves is represented with a vertical line at full employment level of real GDP.
Demand pull inflation in the AS model-
- demand pulls (to the right) which causes prices to increase based on increase in aggregate demand.
-in the short run , demand pull will drive up prices , and increase production
-in the long run, increase in aggregate demand will eventually return to previous levels.
Cost push and the extended model-
-cost push (to the left) arises from factors that will increase per unit costs such as increase in the price of a key resource.
dilemma for the government-
-in and effort to fight cost push, the government can react in 2 different ways:
1. action such as spending by the government could begin an inflationary spiral.
2. no action however could lead to recession by keeping production and employment levels declining.
Sunday, April 3, 2016
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