420 midterm itouch - 1 Define and comment briefly on a b c...

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1. Define and comment briefly on: a) Bretton Woods System b) Marshall-Lerner conditions c) Purchasing power parity d) Amortization e) Offer curve f) Foreign trade multiplier g) Impact of capital movement on exchange rates h) Autonomous capital movements Bretton Woods System - From after WW II to 1971, each central bank was responsible for intervening and maintaining the value of each currency relative to the US dollar. This was a fixed exchange rate system. Marshall-Lerner conditions - If the exchange rate elasticities of demand for imports and exports is combined greater than 1, then the country can devalue its currency to have a more stable economy. If the combined elasticities is less than 1, the devaluation makes the economy worse off. If they were equal to 1, the devaluation has no effect. This was how equilibrium conditions were met. Purchasing power paritv - A change in the ratio of two currencies is proportional to the change in two country's price levels Amortization - A deduction of an expense in installments, rather than all at once. Shows up in capital accounts. Offer Curve - The offer curve tells us the amount of exports vs. imports of a country as the relative price of the good in question changes. It tells us how much a country will export and import of the respective products. Where two countries offer curves meet is the international exchange ratio. Foreign Trade Multiplier - The ratio of change in income to the change in exports and/or investments. The domestic is the ratio of a change in income associated with a change in imports. The higher the imports (MPM), the less purchasing power parity. K=l/(MPM + MPS) Impact of capital movement on exchange rates - Capital movements can either increase or decrease the exchange rates between countries. Depending on the policies and technologies issued, vast improvement can increase the rate for a particular country Autonomous capital movements- This occurs when business & profits are motives in hand. These are transactions made by the government for its own purposes, such as foreign policies unrelated to BOP. It is independent from balance of trade. IMP,IWO, and World Bank are examples. National income equilibrium - (see graphs below) At pt. 2, the economy is at internal equilibrium but is in a balance of payments deficit. A devaluation is needed to bring the economy to external equilibrium.
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both countries will benefit if the relative price internal external | \ Y | surplus / | Y\ /B | \ infl. | / | \. / | \ | / | \/ | un- \ | / | / \. |_emp\_Y |_/ deficit__ |__B/_ \Y Income effect- When an economy appreciates its currency, goods become more expensive to foreigners and foreign goods become less expensive to appreciating country. The country will import more, taking in capital and driving up the income with a balance of payments surplus. Because income went up, the country will tend to want more imports.
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420 midterm itouch - 1 Define and comment briefly on a b c...

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