Exam 3 Review

# Exam 3 Review - ECON 2305 Exam 3 Review Spring 2011 Date...

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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 country’s 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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## This note was uploaded on 09/28/2011 for the course ECON 2305 taught by Professor Pollyhardee during the Spring '09 term at University of Houston.

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Exam 3 Review - ECON 2305 Exam 3 Review Spring 2011 Date...

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