Transcript mcjags.com

Winners [anyone buying with dollars]
1. American tourists to Mexico
2. People who send dollars to family or friends in Mexico
3. U.S. businesses that buy from Mexico
4. American consumers who buy Mexican imports
5. Those who primarily do business in dollars
Losers [anyone buying with pesos]
1. Mexicans who buy American products
2. Mexican businesses that buy supplies from the U.S.
3. American businesses that sell products to Mexico
4. Mexican visitors to the U.S.
5. Those who primarily do business in pesos
$1 = P3.5
$1 = P13.0
$24,000 car = 84,000 pesos
$24,000 car = 312,000 pesos
2002 AP Essay on Higher Interest Rates in the U.S.
in
2002 FRQ
[Nominal IR-Inflation = RIR]
The real interest rates [RIR] in the U.S. & Japan are equal to 7% [say 9%-2%=7%].
The real interest rate in the U.S. increases to 8% while the real interest rate in
Japan decreases to 6%.
a. How & why will financial capital flows be affected
by this change in real interest rates?
[financial capital, not real capital]
D1
S
$/¥
b. Using a correctly labeled graph for the yen
D2
market, show and explain how the value of
$1.15
E1
the yen will change relative to the value of
A
$1.00
the dollar.
E2
c. Explain how the change in the value of the
yen will affect each of the following in the U.S.
(D) # of Yen
(1.) Imports from Japan
(2.) Exports to Japan
1. Assume that the U.S. trades with Japan. Draw a correctly labeled graph
of the foreign exchange market for the U.S. dollar. Let’s say that
United States output [GDP] decreases. Show & explain how the supply
of the U.S. dollar will be affected in the foreign exchange market..
S2$
D$
S1 $
¥/$
¥120
¥100
E2
E1
Answer 1: The decrease in
real U.S. output will cause
job losses in the U.S. and
decrease the dollars supplied
for Japanese goods.
Quantity of Dollars
2. Given your answer in 1, indicate what will happen to the
value of the U.S. dollar relative to the Japanese yen.
Answer 2: Due to the decrease in supply of U.S. dollars
[as shown above], it will take more yen to purchase a dollar,
depreciating the yen and therefore appreciating the dollar.
Other Strange Sounding Currencies
India’s Rupee
Indonesia’s Rupiah
Brazil’s Real
Laos Kip
Kip
Eritrea’s Birr
Iran’s Rial
Spain’s Peseta
Kuwait’s Dinar
Saudi Arabia’s Riyal
Mongolia’s Tugrik (mongo)
Gambia’s Dalasi (bututs)
Hungary’s Forint (filler)
S. Korean won (100 chon)
Brazil’s Real Nicaragua’s Cordoba
Costa Rica’s Colon (100 centimos)
Guatemala’s Quetzal
5
Zambia’s Kwacha
Kuna
Croatia’s Kuna
Botswana’s Pula
Venezuela’s Bolivar
Bulgaria’s Lev (100 stotinki)
China’s Renminbi
Russia’s ruble
Ghana’s Cedi
Haiti’s Gourde
Thailand’s Baht (100 satang)
Afghanistan’s Afgani (puls)
The Afghan note–10,000 Afghanis is worth
25 U.S. cents; or $1 = 40,000 Afghanis.
The $25 million reward for Osami is worth
950 billion Afghanis. With a typical wage
of $4 a month, the typical Afghan could
live 500,000 years off the reward.
[worth 25 cents]
In Afghanistan, there are trillions of
Afghan bills but they have little value.
They are burning much of the currency
and hope to shrink the currency notes from
[worth 12.5 cents]
$15 trillion all the way down to $15 billion.
The Afghan has become diluted in value, almost worthless,
because of overprinting and counterfeiting. They are
tossing old bills into an incinerators to make Afghans
more scarce.
And why haven’t
we bee able to
find
Osama?
1. Increase in taste
[more demand for a country’s products or assets]
2. Increase in interest rates
[Overseas investors increase their investments there.]
3. Decrease in price level
[overseas buyers want to buy our cheaper goods.]
4. Decrease in growth rate
[A country’s declining economy results
in them buying less from other countries;
decreasing demand for their currency
and thus appreciating the declining
economy’s currency]
5. Decrease in the price of a currency
relative to the other
(50%) 1. If Mexico increases their investments in the U.S., the supply of Mexican
pesos to the foreign exchange market and the dollar price of the peso will
most likely change in which of the following ways?
Supply of Pesos
Dollar Price of Peso
a. increase
increase
As pesos are exchanged for dollars, peso
b. increase
decrease supply increase in depository institutions.
c. decrease
increase
There is an increase in demand for the
d. decrease
decrease dollar and it appreciates, decreasing the
e. decrease
not change dollar price of the peso.
(41%) 2. If the real interest rate in Canada increases relative to the real interest rate
in Japan and there are no trade barriers between the two countries, then for
Canada, which of the following will be true of its financial capital, the value
of its currency, and its exports?
Capital Flow
Currency
Exports The higher real IR in Canada
a. Inflow
Appreciation
Increase would attract more financial
b. Inflow
Appreciation
Decrease capital “inflows” from overseas,
c. Inflow
Depreciation
Increase appreciating the Canadian
d. Outflow
Depreciation
Increase dollar, and decreasing its
e. Outflow
Appreciation
Decrease exports because they are
now more expensive.
Remember that physical capital ‘chases’ lower interest rates
and financial capital 'chases' higher interest rates.
(51%) 3. With an increase in investment demand in the U.S. the real interest rate
rises. In this situation, the most likely change in the capital stock in the U.S.
and in the international value of the dollar would be which of the following?
Capital Stock in
International Value
United States
of the Dollar
More real investment would result in an
a. Increase
Decrease
increase in real capital stock in the U.S.
b. Increase
No change
The increase in the real interest rate would
c. Increase
Increase
increase financial investment demand
d. Decrease
Increase
for the dollar as it appreciates.
e. No change
Decrease
(64%) 4. Which of the following would cause the U.S. dollar to
increase in value compared to the Japanese yen?
a. An increase in the money supply in the U.S.
b. An increase in interest rates in the U.S.
c. An increase in the U.S. trade deficit with Japan
d. The U.S. purchase of gold on the open market
e. The sale of $2 billion dollars worth of Japanese television sets to the U.S.
(71%) 5. Which of the following best explains why many U.S. economists support
free trade?
a. Workers who lose their jobs can collect unemployment compensation.
b. It is more important to reduce world inflation than to reduce U.S. unemployment.
c. Workers are not affected; only business suffer.
d. The long-run gains to consumers & some producers exceed the losses to other producers.
e. Government can protect U.S. industries while encouraging free trade.
Appreciation/Depreciation Practice
1. If Japan buys 10 million iPhones
the dollar would (appr/depr) and our
imports from Japan would (incr/decr).
2. If U.S. in. rates are increasing faster
than Japan’s, the dollar would (appr/depr)
and our exports would (increase/decrease).
3. If prices are dropping more in Japan
than in the U.S., the yen will (appr/depr)
and Japan’s imports will (increase/decrease).
4. If the U.S. growth rate is faster than that of Japan,
the dollar will (appreciate/depreciate) and U.S.
imports from Japan will (increase/decrease).
5. If the dollar price of the yen decreases, the
dollar has (appreciated/depreciated) and our
imports from Japan will (increase/decrease).
Appreciation/Depreciation Practice
[continued]
6. If Russia sells 10 bil. worth of oil to the
U.S. the ruble would (appr/depr) and their
imports from the U.S. would (incr/decr).
7. If U.S. in. rates are decreasing faster here
than in Canada, the dollar would (appreciate/
depreciate) & U.S. exports would (incr/decr).
8. If prices are increasing more in Japan
than in the U.S., the dollar will (appr/depr)
and our exports will (increase/decrease).
9. If the U.S. growth rate is slower than that of Canada,
the Canadian dollar will (appreciate/depreciate) & Canada’s
exports to the U.S. will (increase/decrease).
10. If the dollar price of the euro increases, the
dollar has (appreciated/depreciated) and our our
imports from France will (increase/decrease).
• Measure of money inflows and
outflows between the U.S. and
the Rest of the World (ROW).
–Inflows are referred to as CREDITS
–Outflows are referred to as DEBITS
• Balance of Payments is divided into 3 accounts.
– Current Account – transactions that involve “the three
nets”, net exports, net investment and net transfers
– Capital/Financial Account [Capital Account is “net debt
forgiveness” and Financial Account is net purchases of
real and financial assets]
– Official Reserves Account – net foreign currency
[foreign currency holdings of the Fed]
IN
OUT
• Every transaction in the balance of payments is
recorded twice in accordance with standard
accounting practice.
– Ex. U.S. manufacturer, John Deere, exports $50 million
worth of farm equipment to Ireland.
• A credit of $50 million to the current account.
( - $50 million worth of farm equipment or physical assets).
• A debit of $50 million to the capital/financial account.
( + $50 million worth of Euros or financial assets).
– Notice that the two transactions offset each other.
Theoretically, the balance of payments should
all ways equal zero…Theoretically
IN
OUT
• Lucky for you, in AP Macroeconomics we
only worry about the 1st half of the
transaction. We simplify and see the
export of farm equipment as a credit
(inflow of dollars) to the current account.
• Why then, did I mention double entry
bookkeeping?
– To help you understand that the current
account and capital/financial account
are intrinsically linked together and
help balance each other?
– Yes, that’s it!
• Net Exports or Balance of Trade
– Exports of Goods/Services – Import of Goods/Services
– Exports create a credit to the balance of payments
– Imports create a debit to the balance of payments
• Net Investment Income [Interest, dividend, rent & profit income]
– Interest, dividend, and profit income earned by Americans
abroad minus the same income paid to foreigners.
– Ex. Payments to American basketball players playing for
European teams minus payments to Manu Ginobli, Yao
Ming, Pau Gasol, Steve Nash and Dirk playing in the U.S.
• Net Transfers
MVP
– Foreign aid, pensions, money sent back home, etc.
– Ex. Mexican migrant workers send money to family in
Mexico. [Mexican workers send $24 billion back to Mexico.]
Capital Account [net “debt forgiveness”] & Financial Account [foreign purchase
of U.S. real & financial assets & U.S. purchase of foreign real & financial assets.]
• Balance of Payments – sum of all the transactions that take place
between U.S. residents and the residents of all foreign nations.
• There are three components: the Current Account, the Capital/
Financial Account, and the Official Reserves.
• The Current Account includes [3 nets]four things:
• 1. Goods [balance on goods (merchandise)]
• 2. Services [balance on goods and services]
Net Exports
• 3. Net investment income [interest, dividend, & profit income]
• 4. Net transfers [foreign aid, pensions, money sent back home, etc.]
•
•
•
•
•
•
•
The Capital and Financial Account includes three items:
1. Balance on capital account [net “debt forgiveness”]
2. Foreign purchases of U.S. assets [real or financial] in U.S. Financial
3. U.S. purchases of foreign assets [real or financial] abroad. Account
The difference between these two accounts is the “balance of payments.”
They should balance.
If not, official reserves will be used to balance them.
•
•
[a + here means we will export a stock of foreign money ($’s will enter the U.S.)]
[a – here means we will import a stock of foreign money ($’s will exit the U.S.)]
[If you bought a parachute from a factory in Germany–Current Account]
[If you bought a parachute factory in Germany – capital investment, so Capital Account]
Current Account [trade in currently produced goods, svcs, net investment & transfers]
(1) U.S. goods exports……………………………………………$+1,046
(2) U.S. goods imports………………………………………..…... -1,563
(3) Balance on goods [visibles]………..…………………………………………..$-517
(4) U.S. exports of services [shipping, insur., tourists, bank.] +509
(5) U.S. imports of services…………………………………..…….- 371
(6) Balance on services [invisibles]………………………..................................+ 138
(7) Balance on goods and services…………………………………….…………. .-737
(8) Net investment income (income earned for svc of exported capital [money]
[Profits received from overseas investment (interest, dividends, and rents)]
……………………………………………………………………… + 89
(9) Net transfers (gifts given to the indivs, foreign aid, pensions, etc.)…… - 130
(10) Balance on current account…………………………………………………..-420
Capital Account [a “net” account that mainly measures “debt forgiveness”]
(11) Balance on capital account ………………………………..…………………....-3
Financial Account [buying/selling of physical & financial assets (stock/bonds)]
$0
(12) Foreign purchases of assets in the U.S. ………………….. +548
(12) U.S. purchases of assets abroad……………….…………… -125
(13) Balance on financial account…………………………………………….…..+423
(14) Balance on capital and financial account………………………………….+420
$0
Current Account - something is physically transferred to another country.
Capital/Financial Acct – nothing is physically transferred but ownership of
the real [land/factory] or financial asset [stocks/bonds].
Cap/Finan. 1. Joe buys $30,000 worth of stock from Korea’s Hyundai.
_____
Cur.Acct 2. France buys bombers and machine guns manufactured
_____
in N. Carolina.
Cap/Finan. 3. Toyota builds a Tundra manufacturing plant in
_____
San Antonio, TX.
Cur.Acct 4. An American purchases a Japanese made Toyota Prius.
_____
Cur.Acct 5. Boeing sells a new 787 to France.
_____
Cur.Acct 6. An ARAMCO employee working in Saudi Arabia sends
_____
most of his pay to his family in Plano, TX.
Cur.Acct 7. Americans donate $100 million in earthquake relief to
_____
Chinese relief organizations.
Cur.Acct 8. The U.S. exports 50 tons of steel to Ireland.
_____
Cap/Finan. 9. Ford buys three manufacturing plants in Taiwan.
_____
_____
Cap/Finan. 10. Japanese banks purchase U.S. Treasury Bonds.
Current=Short term
Current Acct+Capital/Financial Acct = 0
Capital=Long term
Capital/Financial Acct
(16%) 7. If a country has a current account deficit, which of the following must be true?
a. It must also show a deficit in its capital/financial account.
b. It must show a surplus in its capital/financial account.
c. It must increase the purchases of foreign goods and services.
d. It must increase the domestic interest rates on its bonds.
e. It must limit the flow of foreign capital investment.
2. Balance of payments accounts record all of a country’s international transactions during a year.
(a) Two major subaccounts in the balance of payments accounts are the current account and the
capital/financial account.
In which of these subaccounts will each of the following transactions be recorded?
(i) A United States resident buys chocolate from Belgium.
Answer to 2. (a) (i):
Chocolate from Belgium would go in the current account as it includes the import of goods.
1 pt – current account
(ii) A United States manufacturer buys computer equipment from Japan.
Answer to 2. (a) (ii):
Computer equipment by a U.S. manufacturer would also be classified as an import so it
would also go on the current account.
1 pt – current account
(b) How would an increase in the real income in the United States affect the United States current
account balance? Explain.
Answer to 2. (b):
An increase in real income would make U.S. citizens richer. We would buy more imports,
decreasing net exports, and increasing the deficit on the current account.
2 pts - 1 pt – imports increase or Xn decrease.
1 pt – current account balance decreases or current account balance goes into deficit.
U.S. Goods export………………….…….…..+$100
U.S. Goods imports……………………………...-80
U.S. Service exports…………………………... +40
U.S. Service imports………………………….…-90
Net Investment income………………..……….+20
Net transfers………………………………….…..-15
Balance on capital account …………………….-5
Foreign purchase of assets in the U.S………+45
U.S. purchases of assets abroad……………..-10
Official Reserves…………………………………. -5
1. The U.S. is experiencing a balance on goods (deficit/surplus) of ($10/$20/$30)
billion.
2. The U.S.’s balance on goods & services is a (deficit/surplus) of ($30/$40)
billion.
3. The U.S.’s balance on the current account is a (deficit/surplus) of ($25/$35).
4. The balance on the capital and financial account is a (surplus/deficit) of
($25/$30/$40).
5. The U.S. is experiencing a balance of payments (surplus/deficit) of $5.
[don’t include official reserves here]
6. The “official reserves account indicates the U.S. (imported/exported)
$5 billion of its stock of foreign reserves.
[A + here means we will export a stock of foreign money ($’s will enter U.S.)]
[A – here means we will import a stock of foreign money ($’s will exit U.S.)]
Balance on Goods
Bal. on Curr. Acct.
Balance on Cap.
& Financial Acct.
U.S. Goods export………………….…….…..+$100
U.S. Goods imports……………………………...-80
U.S. Service exports…………………………... +40
U.S. Service imports………………………….…-90
Net Investment income………………..……….+20
Net transfers………………………………….…..-15
Balance on capital account …………………….-5
Foreign purchases of assets in the U.S…… +45
U.S. purchases of assets abroad…………… -10
Official Reserves…………………………………. -5
$20
-$50
$5
G/S
-$30
-
Current
$25
Account
Balance of
Payments
$5
$30
1. The U.S. is experiencing a balance on goods(deficit/surplus)of ($10/$20/$30).
2. The U.S.’s balance on goods & services is a (deficit/surplus) of ($30/$40) bil.
3. The U.S.’s balance on the current account is a (deficit/surplus) of ($25/$35).
4. The balance on the capital and financial account is a (surplus/deficit) of
($25/$30/$40).
5. The U.S. is experiencing a balance of payments (surplus/deficit) of $5.
[don’t include official reserves here]
6. The “official reserves account indicates the U.S. (imported/exported)
$5 billion of its stock of foreign reserves.
[A + here means we will export a stock of foreign money ($’s will enter U.S.)]
[A – here means we will import a stock of foreign money ($’s will exit U.S.)]
17 Ed.
Goods exports……….………………..+$45
Answer the next 8 questions[33-40]
Goods imports….………………………-$75
33. The balance on goods is a
Service exports……………………….+$15 -$20
(deficit/surplus) of ($25/$30/$40) billion.
Service imports………………………..-$10
34. The balance on goods and services is a
-$10
$5
Net investment income……………..-$10
(deficit/surplus) of ($25/$45/$55) billion
Net Transfers………………………… +$15
35. The balance on the current account is a
Balance on capital account…………. -$5
(deficit/surplus) of ($20/$25/$30) billion.
$25
Foreign purchases of U.S. Assets..+$30
$45 $10
36. The balance on the capital account is a
U.S. purchases of assets abroad… -$15
(deficit/surplus) of ($10/$20/$30) billion.
-$5
37. This country is experiencing a balance of payment Official Reserves………………………+$10
(surplus/deficit) of ($10/$20).[Do not include official reserves]
38. The “official reserves” account indicates this country (imported/exported) $10 billion of its
stock of foreign reserves.
39. If the foreign purchases of U.S. assets had been +$45 instead of +$30, then this country would
have to (import/export) a $5 billion stock of foreign currency & official reserves would read (-$5/+$5).
40. The current account, capital account, & official reserves must always net to (0/50/100).
41. We give (inpayments/outpayments) for imports & get (inpayments/outpayments) for exports.
42. U.S. export transactions create foreign (demand for/supply) dollars[appreciation] & this
satisfaction (increases/decreases) the supplies of foreign monies held by U.S. banks [depreciation].
43. If we brought home our 40,000 troops in South Korea, this would contribute to a
U.S. balance of payments (surplus/deficit).
44. U.S. tourists traveling in large numbers to Europe would contribute to a U.S. balance of
payments (surplus/deficit).
45. The U.S. balance of payments show the balance between (all/some of) the payments the
U.S. receives from foreign countries and (all/some of) the payments which we make to them.
46. If a nation’s merchandise exports are $60 billion, while its merchandise imports are
$70 billion, this nation is experiencing a balance of trade (surplus/deficit) of $10 billion.
47. The (current/capital) account includes trade in currently produced goods/services[X-M].
48. The (current or capital/financial) account reflects flows of real [land, factories, etc.] and
financial assets [securities].
49. There (must/must not) always be a balance of a nation’s total international payments.
[includes “official reserves”]
50. A deficit on the current account tends to cause a (deficit/surplus) on the capital account.
“I have a comparative advantage.”
Review for
Global Trade
10
Peru’s DCC
1C = ½
__P
1 P = __C
2
5
5
Pastries
Pastries
10
Brazil’s DCC
1C = __
2 P
½ C = 1P
__
2½
0
2½ 5
Crusts
10
0
5
Crusts
Terms of Trade
[or anywhere between ½ P & 2 P]
1C = ____
1P [like ¾ , 1 ¼ , 1 ½, or 1 ¾ P]
10
Peru will produce Crusts and trade with Brazil for 1 Pastry [better than ½ P]
Brazil will produce Pastries & trade with Peru for 1 Crust [better than ½ C]
*Both Brazil and Peru are able to consume (CPC) beyond their PPCs.
Brazil has an absolute advantage [absolutely more] in pastries.
_______
_______
Peru has an absolute advantage [absolutely more] in crusts.
60
Mexico’s PPF (tons)
U.S. PPF (tons)
90
Avocados
Avocados
Product A B C D E Product A B C D E
Avocados 0 20 24 40 60 Avocados 0 30 33 60 90
Soybeans 15 10
9 5 0 Soybeans 30 20 19 10 0
24 A
19 S
DCC: 1S costs ___A
DCC: 1S costs ___A
4
3
33 A
1/3 S costs 1A 289 SS
___
___
¼ S costs 1A 57 A
0
30
0Soybeans
15
Terms of Trade: 1S = ___
3.5 A
Soybeans
1. In Mexico, the opportunity cost of 1S is (1/3 or 4 or 5 ) avocados.
2. If these 2 nations specialize, Mexico will produce (avocados/soybeans) & the
U.S. will produce (avocados/soybeans).
3. Mexico has an absolute disadvantage in
(avocados only/soybeans only/both avocados and soybeans).
4. If both produced at combination “C” prior to specialization, what would be the
gains after trade? (0/3/2/10) tons of avocados and (1/3/2/10) tons of soybeans.
5. The terms of trade would be 1 ton of soybeans for (1/3/4/3.5) tons of avocados.
Djibouti
Caviar 10 hours
Wheat 5 hours
DCC: Djibouti
2 W
1C costs ___
___C costs 1W
½
Mexico
Caviar 18 hours
Wheat 6 hours
DCC: Mexico
1C costs ___
3 W
1/3
___C costs 1W
Terms of Trade: 1C = ___
2.5 W
6. (Djibouti/Mexico) has an absolute advantage in both commodities.
7. (Djibouti/Mexico) has a comparative advantage in producing wheat.
8. (Djibouti/Mexico) has an absolute disadvantage in both commodities.
9. Djibouti/Mexico) has a comparative advantage in caviar.
10. Trade can occur between the two when 1 caviar is exchanged for(1/2.5/3) wheat.
Absolute Advantage [Outputs v. Inputs]
Remember that with outputs or quantity, the larger
number indicates absolute advantage; that country
can produce “absolutely more” with the same inputs,
and is more efficient.
Product
Market
And with inputs (hours), the smaller number indicates absolute
advantage; that country is more efficient because it can produce
a good “absolutely faster” the same output.
Resource
Market
Output v. Input
Rabbit
Wabbit Rabbit
Wabbit
1G=3B
1G=2B 1B=3G
1B=2G
1/3 G=1B Rabbit Wabbit 1/2 G=1B 1/3 B=1G Rabbit Wabbit 1/2 B=1G
Terms of Trade: 1G = 2.5 B
Product Market [outputs]
Country Guns Butter
Rabbit
40 units 120 units
Wabbit
20 units
40 units
Terms of Trade: 1B = 2.5 G
Resource Market [inputs]
Country Guns Butter
Rabbit
40 hours 120 hours
Wabbit
20 hours
40 hours
What country has an absolute
advantage in guns? Rabbit
Why does Rabbit have an
absolute advantage in guns?
What country has an absolute
advantage in guns?Wabbit
Why does Wabbit have an
absolute advantage in guns?
Wabbit can produce guns
absolutely faster than Rabbit
Rabbit can produce absolutely
more guns than Wabbit
[40 units v. 20 units]
What country has a
comparative
advantage in guns? Wabbit
Wabbit can produce guns at a lower
opportunity cost [2 butters v. 3 butters]
[20 hours v. 40 hours]
What country has a
comparative
advantage in guns? Rabbit
“Let’s change inputs into outputs.”
Rabbit can produce guns at a lower
opportunity cost [1/3 butter v. 1/2 butter]
As Interest Rates Rose . . .
[all the way to 13%]
“Strong Dollar”
The dollar
got stronger
and stronger
81
82
83
84
85
“Exports decreased. Agricultural exports
dropped from $44 billion to $28 billion as
foreign agricultural goods became cheaper.”
Exports
[Decreased]
81
82
83
84
85
Imports
Imports increased as
they became cheaper.
[Increased]
81
82
83
84
85
Appreciation/Depreciation
[Exchange Rate:
P
rice
D
1
S
Japan will supply
D2
$
$
less yen for dollars. ¥/$
S2¥
$/¥ D¥
$1.50
$1
.50
D
A
¥ looking for $’s
¥150
E2
S1¥
S2¥
¥100
E2
D
A
$’s looking for ¥
U.S. will supply more $s for ¥.
E2
S$ S$
¥/$ D$
¥150
E2
S
E1
Yen
¥100
appreciates
D # of ¥ A ¥50
Japan will supply
E3
more yen for dollars.
X M D
+
+
+
+
+
Yen
depreciates
-
$1 = Y100]
¥50
U.S. will supply fewer $s for ¥.
A M X
Taste [products/assets]
Interest Rates
Price Level
Growth Rate
Currency Price
E2
D # of Dollars A
D3
Quantity of Dollars
D
A
+
+
+
+
+
-
$
1. Increase in taste
[more demand for a country’s products or assets]
2. Increase in interest rates
[Overseas investors increase their investments there.]
3. Decrease in price level
[overseas buyers want to buy our cheaper goods.]
4. Decrease in growth rate
[A country’s declining economy results
in them buying less from other countries;
decreasing demand for their currency
and thus appreciating the declining
economy’s currency]
5. Decrease in the price of a currency
relative to the other
1. If Costa Rica buys 1 mil. fewer Dell computers
the dollar would (appreciate/depreciate) & our
exports to Costa Rica would (increase/decrease).
2. If U.S. interest rates decrease faster than
Thailand’s, the baht would (appreciate/depreciate) &
their imports would (increase/decrease).
3. If prices are dropping more in Mexico than
in the U.S., the peso will (appreciate/depreciate)
and Mexico’s exports will (increase/decrease).
4. If Afghanistan’s growth rate is faster than that of China,
the Afghani will (appreciate/depreciate) and Afghanistan’s
exports to China will (increase/decrease).
5. If the dollar price of the Kwacha [Zambia] increases,
the dollar has (appreciated/depreciated) and our
imports from Zambia will (increase/decrease).
6. If Haiti wants to buy 3 million more American iDoggy iWoggies,
the dollar (appreciates/depreciates) and our imports from
Haiti should (increase/decrease).
7. If the quetzal (Guatemala) price of the dollar increases the
quetzal will (appreciate/depreciate) and their imports will (increase/decrease).
1. If Djibouti buys 2 mil. fewer U.S. iFuzzy iWuzzies
the dollar would (appreciate/depreciate) & our
exports to Djibouti would (increase/decrease).
2. If U.S. interest rates are increasing faster
than Ghana’s, the dollar would (appr/depr) &
our imports from Ghana would (incr/decr).
3. If prices are increasing more in Eritrea than
in the U.S., the Eritrean birr will (apprea/deprea)
and Eritrea’s imports will (increase/decrease).
4. If the U.S. growth rate is faster than that of Botswana,
the dollar will (appreciate/depreciate) and U.S.
exports to Botswana will (increase/decrease).
5. If the dollar price of the Croatian kuna increases, the
dollar has (appreciated/depreciated) and our
imports from Croatia will (increase/decrease).
6. If the Congo wants to buy 6 million Lindsay Lohan
dolls, the dollar (appreciates/depreciates) and our
Lohan Doll
imports from the Congo should (increase/decrease).
7. If the markka (Finland) price of the dollar increases the
markka will (appreciate/depreciate) and their imports will (increase/decrease).
Balance on Goods
Bal. on Curr. Acct.
Balance on Cap.
& Financial Acct.
U.S. Goods export………………….…….…..+$100
U.S. Goods imports……………………………...-80
U.S. Service exports…………………………... +40
U.S. Service imports………………………….…-90
Net Investment income………………..……….+20
Net transfers………………………………….…..-15
Balance on capital account …………………….-5
Foreign purchases of assets in the U.S…… +45
U.S. purchases of assets abroad…………… -10
Official Reserves…………………………………. -5
$20
-$50
$5
G/S
-$30
-
Current
$25
Account
Balance of
Payments
$5
$30
1. The U.S. is experiencing a balance on goods(deficit/surplus)of ($10/$20/$30).
2. The U.S.’s balance on goods & services is a (deficit/surplus) of ($30/$40) bil.
3. The U.S.’s balance on the current account is a (deficit/surplus) of ($25/$35).
4. The balance on the capital and financial account is a (surplus/deficit) of
($25/$30/$40).
5. The U.S. is experiencing a balance of payments (surplus/deficit) of $5.
[don’t include official reserves here]
6. The “official reserves account indicates the U.S. (imported/exported)
$5 billion of its stock of foreign reserves.
[A + here means we will export a stock of foreign money ($’s will enter U.S.)]
[A – here means we will import a stock of foreign money ($’s will exit U.S.)]
Appreciation/Depreciation
Price D1$
S$
D2
¥/$ ¥ looking for $’s
¥150
Yen
D
¥100
AYen
depreciates
¥50
E1
$’s looking for ¥
E2
[Exchange Rate: $1 = Y100]
appreciates
E3
D3
X M D Quantity of Dollars A M X
+
+
+
+
+
-
Taste [products/assets]
Interest Rates
Price Level
Growth Rate (Y)
Currency Price
+
+
+
+
+
-
S
Yen Price of $
$ Price of Yen
1. Show how an “ increase in taste”
for Japanese cars would affect the
market for the Yen and the Dollar.
D
e1
$1
D
¥100
€100
S
e1
4. How would a U.S. economic
expansion affect the value of the
Dollar and the value of the Yen?
Yen Price of $
D
S
$1
e1
# of Won
D
¥100
S
e1
# of Dollars
S
e1
P16
# of Euros
Won Price of $
3. How would high inflation in South
Korea affect the market for the Won
and the Dollar?
$ Price of Won
# of Pesos
D
S
D
W1,030
e1
# of Dollars
$ Price of Yen
real interest rate affect the value of
the Peso and the value of the Euro?
e1
# of Dollars
Peso Price of Euro
2. How would an increase in Mexico’s
Euro Price of Peso
# of Yen
D
S
D
$1
S
e1
# of Yen
¥ price of $ D
5. There is a change in consumer
preferences [Taste] for U.S. Goods
by the Japanese.
S
e1
¥100
$ price of ¥
D
S
$1
e1
# of Dollars
¥ price of $
6. Interest Rates in the U.S.
INCREASE relative to the Interest
Rates in Japan.
D
¥100
S
e1
# of Yen
$ price of ¥
D
S
e1
$1
# of Dollars
7. There is a change in consumer
preferences [Taste] for Japanese
¥ price of $ D
S
$ price of ¥
e1
# of Yen
# of Dollars
¥ price of $ D
8. The U.S. economy is in a
strong recovery after the GREAT
RECESSION. GDP, or National Y,
in the U.S. is now HIGHER and
Americans have more DI.
¥100
S
e1
# of Dollars
S
D
$1
e1
¥100
cars, computers and airplanes by
Americans.
# of Yen
$ price of ¥
$1
D
S
e1
# of Yen