Ch 6 Open Economy Macroeconomics

1. What are the three linkages of an economy with the rest of the world? Explain each briefly. Page 85
2. In what two ways does foreign trade influence aggregate demand in an open economy? Page 85
3. What is the Balance of Payments (BoP)? What are its two main accounts? Page 86
4. What is included in the Current Account of the Balance of Payments? Page 86-87
5. What is the difference between Balance of Trade (BOT) and Balance on Invisibles? Page 87-88
6. What transactions are recorded in the Capital Account of the Balance of Payments? Give examples. Page 88
7. Explain the relationship between current account deficit and capital account surplus. Page 88-89
8. Distinguish between autonomous and accommodating transactions in the Balance of Payments. Page 89
9. What is the foreign exchange market? Who are its major participants? Page 91
10. Explain the demand for foreign exchange and the factors that affect it. Page 91
11. Explain the supply of foreign exchange and the factors that affect it. Page 91-92
12. How is the exchange rate determined under a flexible exchange rate system? Page 92
13. What is depreciation and appreciation of domestic currency in a flexible exchange rate system? Page 92-93
14. How do speculation and interest rate differentials affect exchange rates? Page 93
15. Explain the Purchasing Power Parity (PPP) theory of exchange rate determination. Page 93-94
16. What is the difference between devaluation and revaluation in a fixed exchange rate system? Page 94
17. What are the merits and demerits of fixed vs flexible exchange rate systems? Page 95
18. What is managed floating (dirty floating) exchange rate system? Page 95
19. Why is the open economy autonomous expenditure multiplier smaller than the closed economy multiplier? Page 98-99
20. What is the marginal propensity to import (m)? What is its effect on equilibrium income? Page 98

An open economy is defined as one that trades with other nations in:

Movement of goods has traditionally been seen as a substitute for:

Which of the following is recorded in the Current Account?

Transfer payments in the Current Account include:

Balance of Trade (BOT) is the difference between:

A surplus current account means that the nation is:

Which of the following is NOT a part of the Capital Account?

Purchase of an asset by an Indian abroad is entered in the Capital Account as:

In balance of payments equilibrium without reserve movements:

Official reserve sale occurs when:

Accommodating transactions in BoP are also called:

The price of one currency in terms of another currency is called the:

Under a flexible exchange rate system, the exchange rate is determined by:

When the price of foreign currency in terms of domestic currency rises, domestic currency is said to:

According to the Purchasing Power Parity (PPP) theory, exchange rates adjust to reflect differences in:

In a fixed exchange rate system, government action that increases the exchange rate (makes domestic currency cheaper) is called:

Managed floating exchange rate system is also known as:

The open economy autonomous expenditure multiplier is given by:

If c = 0.8 and m = 0.3, the open economy multiplier is:

An autonomous increase in imports (ΔM̄) causes equilibrium income to:

Name the account that records trade in goods, services, and transfer payments. Page 86

Name the account that records international transactions of assets. Page 88

What is the difference between exports and imports of goods called? Page 87

What is the term for receipts that residents get for free without providing goods/services in return? Page 86

What is the term for international transactions made for profit, independent of BoP status? Page 89

What are the transactions that bridge the gap in BoP called? Page 89

The market in which national currencies are traded for one another is called? Page 91

When the domestic currency becomes cheaper in terms of foreign currency in a flexible system, it is called? Page 92

When the domestic currency becomes costlier in terms of foreign currency in a flexible system, it is called? Page 92-93

Government action that makes domestic currency cheaper in a fixed exchange rate system is called? Page 94

Government action that makes domestic currency costlier in a fixed exchange rate system is called? Page 94

The theory that exchange rates adjust to reflect price level differences between countries is called? Page 93-94

The fraction of an extra rupee of income spent on imports is called? Page 98

What is the term for central bank intervention to moderate exchange rate movements without full fixing? Page 95

A situation where exports exceed imports is called? Page 87

A situation where imports exceed exports is called? Page 87