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What happens to €-deposits when the $/€ exchange rate increases?

  • Investors prefer €-deposits over $-deposits.
  • The value of investments in euros becomes more attractive.
  • Returns on €-deposits increase.
  • Returns on €-deposits decrease. (correct)

    • At what point do the returns on €-deposits and $-deposits become identical?

  • At point 2.
  • At point 1. (correct)
  • At any point along the vertical line.
  • At point 0.

    • What occurs when the US Fed increases the money supply?

  • Interest rates on dollar-denominated assets decrease. (correct)
  • Interest rates on dollar-denominated assets increase.
  • The dollar appreciates in value.
  • Investors demand less assets denominated in euros.

    • Which of the following describes the short-run condition concerning prices?

    <p>Prices remain fixed due to menu cost.</p> Signup and view all the answers

    In the long run, which factor is said to be independent of money supply?

    <p>Real output and income level.</p> Signup and view all the answers

    What effect does an increase in money supply have on the LM curve?

    <p>It shifts to the right.</p> Signup and view all the answers

    What occurs as a result of an increase in the US interest rate?

    <p>It decreases real money demand.</p> Signup and view all the answers

    What does an increase in the US price level imply according to the PPP theory?

    <p>The US dollar depreciates.</p> Signup and view all the answers

    What happens to interest rate R as the LM curve shifts to the right?

    <p>It decreases to re-establish equilibrium.</p> Signup and view all the answers

    Once firms recognize a permanent increase in money supply, what do they do next?

    <p>They adjust prices to reflect the money supply increase.</p> Signup and view all the answers

    What primarily determines the long-run relative supply (RS) of US goods?

    <p>Technologies and factor endowments.</p> Signup and view all the answers

    How does an increase in the relative demand for US goods affect the real exchange rate?

    <p>It results in a real appreciation of the dollar.</p> Signup and view all the answers

    What is the effect of an increase in the US money supply in the long run?

    <p>It has no real significance in terms of change in the real exchange rate.</p> Signup and view all the answers

    What happens to the real exchange rate if there is technological progress in Germany?

    <p>It decreases due to a left shift in the relative supply curve.</p> Signup and view all the answers

    Which factor increases the relative price of US goods?

    <p>Increased relative demand for US goods.</p> Signup and view all the answers

    What does a rightward shift in the relative demand (RD) curve indicate about US goods?

    <p>There is an increase in preference for US goods.</p> Signup and view all the answers

    What is the main effect of an increase in the US inflation rate according to the Fisher effect?

    <p>Leads to a higher interest rate</p> Signup and view all the answers

    How does an increase in relative demand for tradable and non-tradable domestic goods affect the long-run real exchange rate?

    <p>It decreases the long-run real exchange rate</p> Signup and view all the answers

    Which of the following describes the effect of increasing the relative supply of domestic products on the dollar?

    <p>The dollar depreciates in real terms</p> Signup and view all the answers

    What happens to the nominal exchange rate when the long-run real exchange rate remains unchanged?

    <p>It experiences a fall over time</p> Signup and view all the answers

    What does the Fisher equation state about the relationship between real and nominal interest rates?

    <p>Real interest rates account for expected inflation</p> Signup and view all the answers

    What is the expected outcome on the real exchange rate if monetary factors are the only changes at play?

    <p>Real exchange rates remain unchanged</p> Signup and view all the answers

    When the real exchange rate is expected to remain unaffected, what does this imply for absolute purchasing power parity (PPP)?

    <p>The first term on the right side equals zero</p> Signup and view all the answers

    How can differences in real interest rates be approximately expressed?

    <p>$r ightarrow R - rac{e}{ ext{inflation}}$</p> Signup and view all the answers

    What is indicated by the relationship aLC/aLW < aLC/aLW?

    <p>Home has a comparative advantage in the production of cheese.</p> Signup and view all the answers

    What happens to the relative price of cheese in autarky at home compared to foreign?

    <p>It is lower than in foreign.</p> Signup and view all the answers

    Which condition indicates that no country will be willing to supply cheese?

    <p>Relative price is below the opportunity cost of cheese.</p> Signup and view all the answers

    When will both countries be eager to supply cheese?

    <p>When the relative price is above the opportunity cost in both countries.</p> Signup and view all the answers

    What does the relative demand for cheese do when its price rises?

    <p>Consumers buy less cheese and more wine.</p> Signup and view all the answers

    What role do relative supply (RS) and relative demand (RD) play in determining prices?

    <p>They adjust to set RS equal to RD.</p> Signup and view all the answers

    Under what condition will specialization occur between both countries?

    <p>When the relative price is between the opportunity costs of both cheeses.</p> Signup and view all the answers

    What is the effect of opening up to trade on the relative prices of goods?

    <p>It establishes prices between both countries' autarky levels.</p> Signup and view all the answers

    How does trade affect the purchasing power of domestic workers?

    <p>It maintains their purchasing power in cheese while increasing it in wine.</p> Signup and view all the answers

    What can be inferred about a country's consumption possibilities with trade?

    <p>Trade expands a country's consumption possibilities beyond its production possibilities.</p> Signup and view all the answers

    What is a common misconception about free trade?

    <p>Only productive countries benefit from free trade.</p> Signup and view all the answers

    What represents the income earned by domestic workers from production?

    <p>The wages, represented as $w$ in the equation.</p> Signup and view all the answers

    In a scenario of free trade, what happens to the production of inefficient goods in less productive countries?

    <p>They avoid high costs associated with domestic production.</p> Signup and view all the answers

    What is a result of trade for foreign workers compared to domestic workers?

    <p>Foreign workers gain in purchasing power through trade, similar to domestic workers.</p> Signup and view all the answers

    What does the equation $w = \frac{\text{World PC}}{aL_C}$ signify about wages?

    <p>Wages are influenced by world market prices and labor efficiency.</p> Signup and view all the answers

    Why is free trade considered beneficial even for unproductive countries?

    <p>They reduce costs associated with inefficient local production.</p> Signup and view all the answers

    What happens to the marginal product of labor as more workers are hired in a fixed labor supply scenario?

    <p>It declines as each additional worker contributes less to output.</p> Signup and view all the answers

    What does the area under the marginal product curve represent?

    <p>Total output produced, denoted as QC.</p> Signup and view all the answers

    What describes the shape of the production possibility frontier (PPF)?

    <p>A bowed-out curve indicating diminishing returns.</p> Signup and view all the answers

    How is the opportunity cost of producing one additional unit of car quantified?

    <p>As MPLF divided by MPLC in units of food.</p> Signup and view all the answers

    What determines the demand for labor in each sector?

    <p>The point at which profit is maximized.</p> Signup and view all the answers

    What relationship defines the equilibrium wage and allocation of labor between sectors?

    <p>Where labor demand curves successfully intersect.</p> Signup and view all the answers

    In the case of car production, what is the equation representing the wage for labor?

    <p>wC = PC * MPLC</p> Signup and view all the answers

    What does the fixed labor supply imply for the production of airplanes and food?

    <p>Labor can only be allocated to one type of production at a time.</p> Signup and view all the answers

    Study Notes

    EFR Summary - International Economics

    • Course: International Economics, FEB12004
    • Academic year: 2024-2025
    • Lectures: 1 to 19
    • Weeks: 1 to 7
    • Teachers: Domenico Favoino, Julian Emami Namini, Laura Hering
    • Publication date: 13.12.2024
    • Author: Economic Faculty Association Rotterdam (EFR).
    • Summary is not a substitute for lectures or other study materials.
    • EFR is not responsible for any errors or omissions in the summary.
    • Contact for summary related questions: [email protected]

    National Income Accounting and Balance of Payments (Lecture 1, Week 1)

    • National income: Income earned by a country's factors of production in a given time period.
    • GNP: Value of all final goods and services produced by a country's factors of production in a given time period.
    • GNP is the sum of:
    • Private consumption (C): spending by individuals on goods and services.
    • Investment (I): spending on capital goods, buildings, infrastructure, and equipment.
    • Government consumption (G): spending by the government on goods and services.
    • Current account (CA): net spending by foreigners on domestic goods and services (exports - imports).
    • Depreciation of physical capital: subtracted from GNP.
    • Unilateral transfers: remittances, foreign aid, and pension payments to expatriates. => National income = GNP – Depreciation + Unilateral transfers
    • GNP and national income are often used interchangeably.

    GDP

    • GDP (Gross Domestic Product): The value of all final goods and services produced within a country in a specified time period, emphasizing the geographic border.
    • GDP = GNP + Payments from foreign countries to domestic factors of production - Payments to foreign countries for foreign factors of production
    • If GNP/GDP < 1, an economy's earnings are dominated by foreign factors of production.

    Expenditures and Production in an Open Economy

    • Y = C + I + G + CA, where Y = national income
    • CA = EX – IM = Y − (C + 1 + G).
    • Exports > Imports: The country earns more than it spends, increasing net foreign wealth.
    • Exports < Imports: The country earns less than it spends, decreasing net foreign wealth.
    • National savings (S) = Y − C − G (part of national income not spent on consumption or government purchases).
    • Current account = National savings – Investment = Net foreign investment

    Balance of Payments (BOP)

    • Balance of payments: Records all transactions between a domestic and a foreign country (using double-entry bookkeeping).
    • Each transaction enters the BOP twice (as a credit + and debit -).
    • Sum of BOP accounts should always equal 0 (current account + financial account + capital account = 0).
    • Current account: Imports and exports of goods and services (merchandise - physical goods).
    • Financial Account: Imports and exports of financial assets or capital.
    • Capital Account: Flows of special, typically non-market, non-produced, or intangible assets.

    Money, Interest Rates, and Exchange Rates (Lecture 2, Week 1)

    • Money: A means of payment (currency, checking accounts, debit cards).
    • Interest rate: Opportunity cost of holding cash; the price of money in a country.
    • Exchange rate: Relative price of national currencies.
    • Money supply: Controlled by the central bank (ESCB) that regulates monetary base, checking deposits, and other monetary assets.
    • Determinants of individual money demand: interest rates on non-monetary assets, risk of unexpected inflation, need for liquidity (prices, transactions and risk).
    • Determinants of aggregate money demand: interest rates, prices, and income.

    Additional Topics (Lectures 3-19)

    • Human Development Index (HDI).
    • Money supply and demand concepts.
    • Inflation and its impact on aggregate demand.
    • Money market equilibrium.
    • The relationship between money supply and exchange rates in the short-run.
    • Short-run vs long-run considering menu costs.
    • Exchange Rate Overshooting.
    • Exchange Rate and Price Levels in the Long Run - Law of one price, PPP, absolute and relative.
    • Monetary Approach to Exchange Rates
    • The Fisher effect and Interest Parity Condition
    • Real Exchange Rate Approach
    • Short-run vs long-run in an open economy
    • Aggregate Demand Components
    • Short-run equilibrium in the goods market
    • DD Curve
    • Short-run equilibrium in the money and foreign exchange market
    • AA Curve
    • Simultaneous Equilibrium in all Markets
    • Adjustment to equilibrium
    • Temporary changes in monetary and fiscal policy
    • Surges expenditures / cuts in tax (fiscal policy).
    • Policies to maintain full employment
    • Permanent changes in monetary and fiscal policy
    • Increased money supply
    • Long-run effects, and relationship between money supply and the price level
    • Long-run relationship between money supply and price level
    • Trade policy in practice: Import tariffs, Export subsidies, Import quotas
    • Local content requirement (LCR)
    • Voluntary export restraints (VER)
    • Export credit subsidies
    • Government procurement
    • Bureaucratic regulations
    • Effective Rate of Protection
    • The median voter theorem and collective action
    • International Trade Policy

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