Economics Exam #2 Notes_2008

Direct channel for external events frequently get

Info icon This preview shows pages 12–15. Sign up to view the full content.

View Full Document Right Arrow Icon
2. Direct channel for external events frequently get internalized (if country A fixes its currency to Country B and Country B’s a country currency changes, Country A’s currency varies based on that foreign country, which effects Country A’s currency and its domestic economy Graph of exchange rates (determined by BP) Demand: generated by domestic agents 1. Buy imports 2. Buy foreign assets (A Foreign ) (invest abroad) Supply: Generated by rest of the world 1. Buy our exports 2. Buy US assets (A US ) (invest in US) DMD FC- generated in home market e down- Quantity demanded of FC RISES Buy more imports/FA (cheaper) e up- Quantity demanded of FC DOWN Foreign goods and assets become more expensive) D FX = FUNCTION (M D & FA D ) (M=imports) Supply FC- Generated by foreigners e up- Quantity supplied (Q S ) of foreign currency RISES Foreign currency worth more (our assets/exports cheaper), foreigners buy more exports (NX up) e down- Q S of foreign currency DOWN FC worth less, foreigners buy less exports (NX down) S Domestic =D Foreign
Image of page 12

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Economics Lecture #15 07:12 Fixed exchange rate- Government sets the price Price ceiling/price floor GRAPH 2 China fixes the value of the Yuan too low, so the value of the US dollar is too high (PRICE CEILING) e fix >e eq , so Q D FC >Q s FC , shortage of Yuan This causes a bilateral trade deficit, because our demand for Yuan is much greater than the supply that exists US BP<0 with respect to China China BP>0 with respect to US Natural market adjustment is for the Yuan to appreciate ($ depreciate), but it cant do that (fixed) To keep the fix, the Chinese central bank has to intervene in the market, they sell Yuan and buy dollars Increases dollar reserves of Chinese central bank (By buying dollars and selling Yuan, they are keeping the supply equal to the increases in demand, if they didn’t constantly increase the supply of Yuan, then the demand and supply would eventually meet since demand would shift to meet supply) Chinese Central Bank: Assets Liabilities Bonds (US treasuries) Currency in circulation Gold/silver certificates Government deposits Gold/silver bullion Bank deposits Foreign currency (claims against foreign government)
Image of page 13
Economics Lecture #15 07:12 Buying $=selling Yuan Up currency in circulation and foreign currency reserves Money supply increases (GRAPH 3) Reduces the Chinese interest rate increases spending overinvestment and inflation Country A has a fixed currency, the country it trades with (Country B) has a trade deficit with Country A. Country A sells its currency for the currency of Country B, increasing the supply of its own currency, decreasing its interest rates, increasing spending and investment, leading to inflation Thai government went from fixed to floating currency, the currency depreciated. China depreciated its own currency, so projections came out that all the country’s in that area will depreciate. People began selling Hong Kong dollars, so the government had to buy its currency
Image of page 14

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 15
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern