ECO2008 International Economics Week 13a

An increase in the money supply leads to higher nominal interest rates due to the adjustment for the higher inflation rate.

An increase in nominal interest rates decreases the demand for real monetary assets as they become less attractive compared to other investment opportunities.

Prices must increase to restore equilibrium in the money market following an increase in the money supply.

<p>The concept of PPP implies that the exchange rate must adjust so that the price levels in different countries align, typically resulting in the depreciation of the domestic currency.</p> Signup and view all the answers

<p>Inflation is only predicted to occur during the transition to long-run equilibrium; it stabilizes at zero in the long run.</p> Signup and view all the answers

<p>Higher domestic inflation expectations lead to increased expected returns on foreign currency deposits, causing the domestic currency to depreciate.</p> Signup and view all the answers

<p>Persistent domestic inflation results in an increase in domestic nominal interest rates as adjusted by expectations of inflation.</p> Signup and view all the answers

<p>The expected return on foreign currency deposits increases during periods of rising inflation, as investors expect better returns from foreign assets.</p> Signup and view all the answers

<p>The price of U.S. goods falls relative to foreign goods, making U.S. exports less expensive and imports more expensive.</p> Signup and view all the answers

<p>Increases in monetary levels lead to temporary inflation and changes in expectations about inflation, influencing nominal exchange rates.</p> Signup and view all the answers

<p>Increases in the relative demand for domestic products lead to a real appreciation of the currency.</p> Signup and view all the answers

<p>An increase in the relative supply of U.S. products leads to a real depreciation of the currency.</p> Signup and view all the answers

<p>When only monetary factors change and Purchasing Power Parity (PPP) holds, there are no changes in the real exchange rate.</p> Signup and view all the answers

<p>An increase in relative supply results in a depreciation of domestic goods in terms of price while increasing domestic output.</p> Signup and view all the answers

<p>When U.S. exports become cheaper due to real depreciation, the demand for these goods increases relative to foreign imports.</p> Signup and view all the answers

<p>Changes in expectations about inflation due to monetary growth lead to persistent inflation, influencing real exchange rates.</p> Signup and view all the answers

<p>It leads to a proportional increase in the nominal depreciation of the dollar.</p> Signup and view all the answers

<p>The nominal exchange rate $E$/€ decreases, leading to an appreciation of the dollar.</p> Signup and view all the answers

<p>It results in a proportional decrease, leading to the nominal depreciation of the euro.</p> Signup and view all the answers

<p>The effect is ambiguous, as it depends on various factors including demand and monetary policies.</p> Signup and view all the answers

<p>Average domestic prices are predicted to decrease relative to average foreign prices.</p> Signup and view all the answers

<p>It leads to a decrease in the nominal exchange rate, resulting in a nominal depreciation of the euro.</p> Signup and view all the answers

<p>Nominal exchange rates are influenced by both Purchasing Power Parity and real output factors.</p> Signup and view all the answers

<p>There is an increase in the nominal exchange rate, leading to an appreciation of the euro.</p> Signup and view all the answers

<p>The 'long run' implies a sufficient amount of time for prices of all goods and services to adjust to market conditions, achieving equilibrium in the markets.</p> Signup and view all the answers

<p>The Law of One Price states that identical goods should sell for the same price in different markets, as exemplified by a $20 pizza attracting buyers while a $40 pizza would not.</p> Signup and view all the answers

<p>People would buy more pizzas from the cheaper restaurant, leading to increased demand and a price rise, while the expensive restaurant would see decreased demand, causing its price to drop.</p> Signup and view all the answers

<p>Transportation costs and barriers can prevent price equalization as they affect the ability of consumers to buy goods from the cheaper market.</p> Signup and view all the answers

<p>Interest rates influence the behavior of currency exchange rates by attracting or repelling investment, affecting supply and demand for currencies.</p> Signup and view all the answers

<p>Competitive markets ensure that price differences trigger buyer behavior that leads to price adjustments, aligning prices across markets.</p> Signup and view all the answers

<p>Consumers in Vancouver would likely travel to Seattle or have pizzas imported from there, increasing demand in Seattle and lowering supply in Vancouver.</p> Signup and view all the answers

<p>An increase in demand or decrease in supply at the $20 restaurant would raise its price, while a decrease in demand or increase in supply at the $40 restaurant would lower its price.</p> Signup and view all the answers

<p>PPP implies that exchange rates are determined by the relative average prices of goods and services in different countries.</p> Signup and view all the answers

<p>The implied exchange rate is C$2/US$1.</p> Signup and view all the answers

<p>Absolute PPP states that exchange rates equal the level of relative average prices, while Relative PPP measures how changes in exchange rates correspond to changes in inflation over time.</p> Signup and view all the answers

<p>It represents that changes in exchange rates are equal to the difference in inflation rates between two periods for the U.S. and the EU.</p> Signup and view all the answers

<p>It suggests that the Canadian dollar would weaken relative to the U.S. dollar.</p> Signup and view all the answers

<p>It ensures fairness in international trade by allowing consumers to have equivalent purchasing power regardless of the currency used.</p> Signup and view all the answers

<p>It may indicate that one country's goods are overpriced or underpriced in comparison to another, leading to potential trade imbalances.</p> Signup and view all the answers

<p>The U.S. dollar would depreciate against the Canadian dollar.</p> Signup and view all the answers

<p>Higher domestic inflation decreases the purchasing power of domestic currency relative to foreign currency, leading to depreciation.</p> Signup and view all the answers

<p>The level of average prices does not immediately adjust, causing the exchange rate to overshoot and the domestic currency to depreciate more than its long-run value.</p> Signup and view all the answers

<p>The level of average prices adjusts with expectations of inflation, resulting in domestic currency depreciation without overshooting.</p> Signup and view all the answers

<p>The real exchange rate is the rate of exchange for goods and services across countries, reflecting their relative value and price.</p> Signup and view all the answers

<p>In this formula, <code>E $/€</code> is the nominal exchange rate, <code>PEU</code> is the price of the EU basket, and <code>PUS</code> is the price of the U.S. basket.</p> Signup and view all the answers

<p>The real exchange rate is 1 U.S. basket per 1 EU basket.</p> Signup and view all the answers

<p>A real depreciation implies that U.S. goods become less expensive and less valuable relative to EU goods.</p> Signup and view all the answers

<p>Overshooting refers to the phenomenon where the exchange rate moves beyond its long-run value due to temporary factors, such as sudden shifts in inflation expectations.</p> Signup and view all the answers

The theory posits that the exchange rate between two currencies should equal the ratio of the price levels of a basket of goods in those two countries.

The price level in one country is equal to the price level in another country when converted using the current exchange rate.

The change in the exchange rate between two currencies is equal to the difference in inflation rates between those two countries.

Used to determine the average price levels for goods and services in different countries.

The U.S. dollar/Canadian dollar exchange rate or the amount of U.S. dollars that can be bought with one Canadian dollar.

The price of a good or service in the United States.

The price of a good or service in Canada.

PPP implies that the exchange rate is determined by the ratio of the price levels in two countries.

The theory that the nominal interest rate in a country will adjust to reflect the expected inflation rate.

The change in the general price level of goods and services in an economy over time.

An economic model that uses supply and demand of money to explain exchange rates.

The rate at which the money supply of a country increases over time.

The process by which an economy adjusts to a long-run equilibrium after a shock, such as a change in monetary policy.

The expected rate of return on a foreign currency deposit, adjusted for the expected exchange rate change.

The rate at which a currency depreciates or appreciates against another currency.

The relative price of a basket of goods in one country compared to another country.

When an increase in the domestic money supply leads to a decrease in the price level relative to the foreign price level.

When the domestic money supply increases, the demand for domestic goods decreases.

Changes in the demand for goods in one country can affect the relative prices of goods in that country.

An increase in the demand for U.S. output will cause the U.S. dollar to appreciate.

An increase in the demand for European output will cause the euro to appreciate.

The change in the nominal exchange rate due to changes in the money supply and output market.

The concept that identical goods traded in different competitive markets should sell for the same price, considering negligible transportation costs and market barriers.

A decrease in the relative price of a country's goods and services, making them cheaper compared to other countries.

A model that explains how exchange rates behave in the long run. It assumes prices of goods and services adjust fully to market equilibrium.

An increase in the relative price of a country's goods and services, making them more expensive compared to other countries.

A scenario where prices have adjusted to market conditions, leaving no room for further changes. This includes the equilibrium of the money market.

The real exchange rate changes when there are changes in the relative demand or supply of goods and services.

The difference in prices between identical goods in different markets that arises due to factors like transportation costs and barriers.

The process where market forces adjust prices, leading to equilibrium. This applies to both supply and demand dynamics.

Increases in monetary levels cause temporary inflation, which can affect exchange rates.

A situation where entrepreneurs exploit price differences between markets, buying goods at lower-priced locations and selling at higher-priced ones, driving prices towards convergence.

Increases in monetary growth rates cause persistent inflation, which can significantly impact long-term exchange rates.

An increase in the relative demand for a country's goods and services leads to a real appreciation of its currency, making its goods relatively more expensive.

The incentive for individuals or businesses to alter their behavior based on changes in prices. This influences market dynamics.

A model that focuses on short-term fluctuations in exchange rates influenced by changes in money supply. It emphasizes liquidity factors.

An increase in the relative supply of a country's goods and services leads to a real depreciation of its currency, making its goods relatively cheaper.

An increase in the expected price level of a country's goods and services, causing its currency to depreciate in value relative to currencies of countries with lower inflation expectations.

A situation where a currency depreciates beyond its long-term equilibrium value due to temporary changes in expectations.

When a country's goods and services become less expensive compared to those of another country.

The monetary approach to exchange rates assumes that changes in prices are directly related to changes in money supply, and that exchange rates adjust to reflect these changes.

The monetary approach to exchange rates with the assumption of PPP, meaning that the exchange rate adjusts to neutralize any differences in inflation across countries.