review_econ116 - Macro 116(b Final Review Capital account...

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Macro 116(b) – Final Review Capital account + current account = 0 - can’t have capital account surplus without current deficit - includes exports (-), imports (+), transfer from US abroad (-), abroad in (+) - (-) current account says net wealth going down capital account: foreign citizen buys in US (+), US buys abroad (-).. stock, bond, currency cancel out because foreign country buys the US money to pay real current account = EX – IM nominal current account = PX EX – PM IM capital account = - (EX + IM) *just capital account, US buys Russian securities, own more foreign assets (-) US capital but had to give bank money for that currency so (+) in US capital account IM = mY m = marginal propensity to import.. this only holds in simple world – in complex depends on same as C *add imports causes multiplier to go down.. not as high as when it was closed economy.. some money that would add to multiplier spent on imports - imports depend on relative prices.. foreign relatively higher then import less, if ours are relatively higher then we substitute away from domestic and buy foreign Price/Trade Feedback Trade FBE: EX(us) = IM(f) EX(us) up, Y(us) up, IM(us) up, EX(f) up, Y(f) up, IM(f) up, EX(us) up multiplier lower than before, BUT higher than when EX are totally exogenous to model closed economy > trade fbe > exports exogenous Price FBE: fixed exchange rates, inflation is exportable – inflation in one results in inflation in other P(f) up, PEX(f) up, PIM(us) up, {shift back AS curve}, P(us) up, PEX(us) up, PIM(f) up P(f) up again… step of P(us) up is where inflation is exportable Supply/Demand in Foreign Exchange Markets *Demand slopes down b/c when e drops, $ depreciates, US goods cheaper for rest of world, people want to buy US goods, demand for US dollars to buy US goods, as exchange rate down, demand out *supply curve up b/c when e appreciates, $ stronger, goods foreign cheaper, take $ to foreign markets to get goods, supply $ to market - our supply $ is = demand foreign - if look from foreigner’s perspective then the curves are shifted.. demand $, supply pound
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