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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?

Prices remain fixed due to menu cost. Signup and view all the answers

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

Real output and income level. Signup and view all the answers

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

It shifts to the right. Signup and view all the answers

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

It decreases real money demand. Signup and view all the answers

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

The US dollar depreciates. Signup and view all the answers

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

It decreases to re-establish equilibrium. Signup and view all the answers

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

They adjust prices to reflect the money supply increase. Signup and view all the answers

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

Technologies and factor endowments. Signup and view all the answers

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

It results in a real appreciation of the dollar. Signup and view all the answers

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

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

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

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

Which factor increases the relative price of US goods?

Increased relative demand for US goods. Signup and view all the answers

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

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

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

Leads to a higher interest rate 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?

It decreases the long-run real exchange rate Signup and view all the answers

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

The dollar depreciates in real terms Signup and view all the answers

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

It experiences a fall over time Signup and view all the answers

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

Real interest rates account for expected inflation 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?

Real exchange rates remain unchanged 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)?

The first term on the right side equals zero Signup and view all the answers

How can differences in real interest rates be approximately expressed?

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

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

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

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

It is lower than in foreign. Signup and view all the answers

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

Relative price is below the opportunity cost of cheese. Signup and view all the answers

When will both countries be eager to supply cheese?

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

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

Consumers buy less cheese and more wine. Signup and view all the answers

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

They adjust to set RS equal to RD. Signup and view all the answers

Under what condition will specialization occur between both countries?

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

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

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

How does trade affect the purchasing power of domestic workers?

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

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

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

What is a common misconception about free trade?

Only productive countries benefit from free trade. Signup and view all the answers

What represents the income earned by domestic workers from production?

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

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

They avoid high costs associated with domestic production. Signup and view all the answers

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

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

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

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

Why is free trade considered beneficial even for unproductive countries?

They reduce costs associated with inefficient local production. 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?

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

What does the area under the marginal product curve represent?

Total output produced, denoted as QC. Signup and view all the answers

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

A bowed-out curve indicating diminishing returns. Signup and view all the answers

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

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

What determines the demand for labor in each sector?

The point at which profit is maximized. Signup and view all the answers

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

Where labor demand curves successfully intersect. Signup and view all the answers

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

wC = PC * MPLC Signup and view all the answers

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

Labor can only be allocated to one type of production at a time. 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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