Final Exam Review (2016) (1) - Final Exam Final Exam The...

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Final Exam
Final Exam The final exam will be held on Friday, December 9, at 3.00 PM in VIC 608. It will last two hours and consist of 60 multiple choice questions and 4 short answer questions. The short answer questions will be similar to those in the problem sets posted on D2L. It is cumulative and will cover Chapters 1-4 and 6-9 of the material in the textbook.
Final Exam What you need to bring to the exam: (1) Student ID – we will be checking student IDs (2) Pencil(s) (3) You may also bring an eraser and a calculator, but these are optional.
Final Exam Although the exam includes chapters 1-4 and 6-9 this review will look only at chapters 4 and 6-9. You should go over the reviews for the midterm test for guidance with chapters 1-3.
Chapter 4 Effects of changes in home interest rate and foreign interest rate From uncovered interest parity (UIP)
Chapter 4
Chapter 4 Fundamental equation of the asset approach. •Changes in the spot exchange rate come from: E e : Expected exchange rate. Forecasts of (future) exchange rate come from the monetary approach. i $ and i : Interest rates at home and abroad. Nominal interest rates come from the money market (home and foreign).
Chapter 4 : Exchange Rates II (Asset Approach)
Chapter 4
Chapter 4 Look at short-run effects of shifts in money supply and money demand Distinguish between temporary shocks (expectations unaffected) and permanent shocks (expectations affected)
Chapter 4 Expanding M leads to weaker currency but - in short-run low interest rates with weaker currency - in long-run high interest rates with weaker currency With temporary policy expectations about future exchange rates are unchanged Not true for permanent policy
Chapter 4 In long-run PPP and Fisher equation apply Prices perfectly flexible In short-run there is price rigidity and interest rates are set through the money market
Balance of Payments I (Chapter 6) Intertemporal Approach Borrowing/lending affects external wealth.
Chapter 4 Permanent increase in the home money supply •Assumptions: Identical economies, output Y fixed. Start in long run equilibrium. Home money supply increases x% at time T. Unexpected. Price level is sticky in the short run. •Solution: Must work backwards to determine what happens to expected exchange rate. The expected change is based on long-run forecasts. These expectations will also affect the market in the short run.
Chapter 4
Chapter 4
Chapter 4 The trilemma Fixed exchange rate International capital mobility Monetary policy autonomy Can only have two of the three.
Balance of Payments I The Long Run Case - Long-run budget constraint (LRBC) : Implications: An initial credit/debt must be balanced by offsetting trade surpluses or deficits in the future (in present value terms). The stream/sum of trade balances is what matters. The LRBC does not require that a debtor country run a trade surplus each and every year, only cumulatively.
Balance of Payments I Assumptions revisited No risk premium

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