Midterm Exam '07

Midterm Exam '07 - ECON 420 Midterm Exam 1. Define &...

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ECON 420 Midterm Exam a) Bretton Woods system - a gold-exchange standard - the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states b) Marshall-Lerner conditions - for a currency devaluation to have a positive impact in trade balance, the sum of price elasticity of exports and imports (abs) must be greater than 1. c) Purchasing Power Parity - the method of using the long-run equilibrium exchange rate of two currencies to equalize the currencies’ purchasing power. - based on the law of one price in that in an efficient market, identical goods must have only one price d) National income equilibrium with balance of payments surplus Balance of payments surplus: when the country produces more goods than it can consume National income equilibrium: where the national income and interest rate intersect e) Income effect of a devaluation - Relies on income changes in the nation and abroad f) Plaza Agreement - the agreement to depreciate the US dollar in relation to the Japanese yen and the German Deutsche Mark by intervening in currency markets - reasons were to reduce the US current account deficit, and to help the US economy to emerge from the early 80’s recession g) The multiplier in an open economy Equation: 1/(1-MPC + MPM) Represents an economy that permits transactions with the outside world, at least including the trade of some goods. h) Impact of capital outflow on the exchange rate (24 pts) Capital outflow: takes form of either an increase in the nation’s assets abroad or a reduction in the foreign assets in the nation, as both involve a payment to foreigners
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2. Explain how the following would be entered into the U.S. balance of payments: (Credit vs.
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Midterm Exam '07 - ECON 420 Midterm Exam 1. Define &...

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