Summary21 - it's the price of a currency in terms of...

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CHAPTER 21 SUMMARY: 1. The United States has run a trade deficit for a long time. Does this mean that the balance of payments is out of balance? The balance of payments cannot be out of balance. It consists of the current account and the capital account. The current account consists mostly of the flow of goods and services into and out of the country. The capital account consists of the flow of financial assets. If the U.S. runs a trade deficit and, consequently, a current account deficit, the capital account must be in surplus by an equal amount. 2. How will the presence of the foreign sector affect the multiplier? The open-economy multiplier is smaller than the simple spending multiplier. The reason is that, as income increases, domestic consumers will spend some of the extra income on foreign, rather than domestic goods. 3. What is the exchange rate and what causes it to change? The exchange rate is the rate at which one currency can be exchanged for another. In other words,
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Unformatted text preview: it's the price of a currency in terms of another. If the demand for a currency goes up or its supply falls, its price will increase. This means that it will take more units of another currency to purchase it. 4. Can a fall in the value of the dollar ever be good for the United States? A fall in the value of a currency is called a depreciation of the currency. When the currency of a country depreciates, it makes goods produced abroad more expensive and it makes domestically produced goods less expensive in foreign markets. As a result, imports go down and exports go up. The increase in net exports tends to increase GDP. 5. Does the presence of the foreign sector help or hinder stabilization policies? The presence of the foreign sector and flexible exchange rates has opposite results on the effectiveness of monetary policy compared to fiscal policy. These factors tend to increase the effectiveness of monetary policy, but decrease the effectiveness of fiscal policy....
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This note was uploaded on 09/14/2009 for the course ECON 304L taught by Professor Staff during the Fall '07 term at University of Texas at Austin.

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