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Unformatted text preview: ECON 2305 Exam 3 Review Spring 2011 Date: Monday, April 25, 2011 Exam Makeup: 38 Multiple Choice Questions 75 Minutes #2 Pencil and Calculator Chapters: 18, 19, & 20; Evenly Weighted Chapter 18- Open-Economy Macroeconomics: Basic Concepts Net Exports = Exports Imports o Exports can be both goods and services o If NX < 0 Trade Deficit In following year, if NX < 0 deficit rises Net Capital Outflow (NCO) o Domestic resident purchases of foreign assets minus foreign residents purchasing of domestic assets o Net Exports = NCO = FAP Dom- DAP For US residents buy assets abroad o Foreign Direct Investment Domestic residents actively manage the foreign investment Example: McDonalds opens a fast-food outlet in Moscow o Foreign Portfolio Investment Domestic residents purchase foreign stocks or bonds supplying Loanable Funds to a foreign Firm Example: American buying stock in foreign company N ational Income Identity o Y = C + I + G + NX o Y C G = I + NCO o Y C T = I + NCO o S Private = S Public Nominal Exchange Rate o The rate at which one countrys currency trades for another o Represented by e Appreciation Strengthening An increase in the value of a currency Depreciation Weakening A decrease in the value of a currency Real Exchange Rate o (e x P)/P* o If e < 1 eP < P* US Goods Cheaper o If e = 1 Nominal Exchange Rate = P*/P o If e >1 eP > P* US Goods More Expensive o Basket of Goods o Single Goods Purchasing Power Parody o A theory of exchange rates whereby a unit of any currency should be able to buy the same quantity of goods in all countries o Based on the Law of One Price o Implies that nominal exchange rates adjust to 1 [Type text]...
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