Outline for Reviewing International Finance (2013)The Structure of Examination Paper1. Multiple Choice (30×1, 30 points)2. Definition of Terms(5×4, 20 points)3. Short Answer (3×10, 30 points)4. Calculation (2×10, 20 points)Outline for ReviewingMultiple ChoiceCover all ChaptersDefinition of Term
Chapter 12: balance of payments accounting, current account balance，official settlements balance，national savingbalance of payments accounting:国际收⽀会计accounting record of all monetary transactions between a country and the restof the world
Current account balance (exports minus imports):经常项⽬差额net expenditure by foreigners on domestic goods and services.The official settlements balance :官⽅结算差额is the negative value of official international reserve assets, and it shows acentral bank’s holdings of foreign assets relative to foreign central banks’holdings of domestic assets.The bookkeeping offset to the balance of official reserve transaction .
National saving = national income (Y) that is not spent on consumption (C) or government purchases (G).
Chapter 13: appreciation, exchange rate, real rate of return, forward exchange rate, spot exchange rate, interest paritycondition, vehicle currency
Appreciation is an increase in the value of a currency relative to another currency.Exchange rate: The price of one currency in terms of another is called an exchange rate.
The real rate of return :The expected rate of return that savers consider in deciding which assets to hold is the expected realrate of return, that is, the rate of return computed by measuring asset values in terms of some broad representative of productsthat savers regularly purchase. forward exchange rates: Foreign exchange deals sometimes specify a value date farther awaythan two days30 days, 90 days, 180 days, or even several years. The exchange rates quoted in such trans-actions are calledforward exchange rates.
The foreign exchange transactions we have been discussing take place on the spot: two par-ties
agree to an exchange of bank deposits and execute the deal immediately. Exchange rates governing such \"on-the-spot\"trading are called spot exchange rates, and the deal is called a spot transaction.
Interest parity condition:Interest parity implies that deposits in all currencies are equally desirable assets.Interest parity implies that arbitrage in the foreign exchange market is not possible.
vehicle currency:周转货币Because of its pivotal role in so many foreign exchange deals, the dollar is sometimes called avehicle currency
Chapter 14: aggregate money demand, money supply, exchange rate overshooting, Aggregate money demand:货币总和需求aggregate money demand is the total demand for
money by all households and firms in the economy.is just the sum of all the economy’s indiv idual money demands.Money supply: the total stock of money in the economy; currency held by the public plus money in accounts in banks
Exchange rate overshooting:the exchange rate is said to overshoot when its immediate response to a disturbance is greaterthan its long-run response.
Chapter 15: Fisher effect, law of one price, nominal interest rate, purchasing power parity (PPP), real exchange rate, relativePPP
Fisher effect: describes the relationship between nominal interest rates and inflation.
Law of one price: the low of one price states that in competitive markets free of transportation costs and official barriers to
trade(such as tariffs),identical goods sold in different countries must sell for the same price when their prices are expressed interms of the same currency.
Nominal interest rate:名义利率An interest rate is called nominal if the frequency of compounding (e.g. a month) is not identicalto the basic time unit (normally a year). Purchasing power parity(PPP): the theory of purchasing power parity states that theexchange rate between two countries’ currencies equals the ratio of the countries’ price levels.Real exchange rate: the rate of exchange for goods and services across countries
Relative PPP: states that the percentage change in the exchange rate between two currencies over any period equals thedifference between the percentage changes in national price levels. Chapter 16: AA schedule, inflation bias, aggregatedemand, J-curve, DD schedule, pass-through
AA schedule: The schedule of exchange rate and output combinations that are consistent with equilibrium in the domesticmoney market and the foreign exchange market is called the AA schedule.
inflation bias: Refers to the difference between the mean value and the target value of inflation according to the circulation bythe basic model.
DD schedule: The curve shows all combinations of output and the exchange rate for which the output market is in short runequilibrium.
pass-through: The percentage from the exchange rate to import prices by which import prices rise when the home currencydepreciates by 1 percent.
Chapter 17: balance of payments crisis, bimetallic standard, capital flight, devaluation,
gold exchange standard, gold standard, imperfect asset substitutability, managed floating exchange rates, perfect assetsubstitutability, reserve currency, revaluation, risk premium, self-fulfilling currency crises, sterilized foreign exchangeintervention,
balance of payments crisis: When a central bank does not have enough official international reserve assets to maintain afixed exchange rate, a balance of payments crisis results.
bimetallic standard: the value of currency is based on both silver and gold.
capital flight:financial capital is quickly moved from domestic assets to foreign assets devaluation: a devaluation occurs whenthe central bank raises the domestic currency price of foreign currency
gold exchange standard: halfway between the gold standard and a pure reserve currency standard is the gold exchangestandard
gold standard: gold acts as official international reserves that all countries use to make official international payments.imperfect asset substitutability: In general, foreign and domestic assets may differ in the amount of risk that they carry: theymay be imperfect substitutes.
managed floating exchange rates: system in which governments may attempt to moderate exchange rate movements withoutkeeping exchange rates rigidly fixed .
perfect asset substitutability:t he key feature of our model that leads to these results is the assumption that the foreignexchange market is in equilibrium only when the expected returns on domestic and foreign currency bonds are the same.reserve currency: one currency acts as official international reserves.
Revaluation: a revaluation occurs when the central bank lower the domestic currency price of foreign currencyrisk premium: default risk and exchange rate risk
self-fulfilling currency crises: Expectations of a balance of payments crisis only worsen the crisis and hasten devaluation thatoccur in such circumstances often are called self-fulfilling currency crises .
sterilized foreign exchange intervention:central banks sometimes carry our equal foreign and domestic asset transactions inopposite directions to nullify the impact of their foreign exchange operations on the domestic money supply . this type of policyis called sterilized foreign exchange intervention
Chapter 18: external balance, internal balance, expenditure-changing policy, price-specie-flow mechanism, expenditure-switching policy
external balance: A country’s current account is neither so deeply in deficit that the country may be unable to repay its foreigndebts in the future nor so strongly in surplus that foreigners are put in that position.
Internal balance: The full employment of a country’s resources and domestic price level stability.
expenditure-changing policy: Changing social needs or total expenditure level of the national economy policy, whose
purpose is to change aggregate demand to change the demand for foreign goods, services and financial assets, and achievethe balance of payments adjustment.
price-specie-flow mechanism: Under the internationally common practice of the gold
standard, a country's international balance of payments can keep equilibrium automatically by the fluctuations of commodityprice and the output or input of gold.
expenditure-switching policy: The policies which can affect the international competitiveness of commodities and to increasetheir income relative to spending by changing the spending structure.Chapter 19:destabilizing speculation
destabilizing speculation：it means that if foreign exchange traders saw that a currency was depreciating, it was argued, theymight sell the currency in the expectation of future depreciation regardless of the currency ‘s longer-term prospects; and asmore traders jumped on the bandwagon by selling the currency, the expectations of depreciation would be realized.
Chapter 20:monetary efficiency gain, economic stability loss, optimum currency areas monetary efficiency gain：the monetaryefficiency gain from joining the fixed exchange rate system equals the joiner’s saving from avoiding the uncertainty,
confusion, and calculation and transaction costs that arise when exchange rates float. economic stability loss：the extrainstability caused by the fixed exchange rate is the economic stability loss
fixed exchange rates are most appropriate for areas closely integrated through international trade and factor movements.Short AnswerChapter 13
1.The Effect of Changing Interest Rates on the Current Exchange Rate
An increase in the interest paid on deposit of a currency causes that currency to appreciate against foreign currencies.A rise in dollar interest rates causes the dollar to appreciate against the euro.
A rise in euro interest rates causes the dollar to depreciate against the euro.
2.The Effect of Changing Expectations on the Current Exchange Rate
A rise in the expected future exchange rate causes a rise in the current exchange rate ,similarly ,a fall in the expected futureexchange rate causes a fall in the current exchange rate .Chapter 14
1.the Money Supply and the Exchange Rate in the Short Runin the short run ,the price level and real output are given .
理解上⾯这个图是什么意思就OK。再分析M变化时Exchange Rate怎么变化。2.Permanent Money Supply Changes and the Exchange Rate.
中⽂版教材357⾯，英⽂版教材87⾯，看懂并能描绘清楚（a）和（b）两幅图。Chapter 15
1.The Relationship Between PPP and the Law of One Price
a)The law of one price applies to individual commodities, while PPP applies tothe general price level.
b)If the law of one price holds true for every commodity, PPP must holdautomatically for the same reference baskets across countries.
Proponents of the PPP theory argue that its validity does not require the law of one price to hold exactly。2.The Fundamental Equation of the Monetary Approach
predicts that levels of average prices across countries adjust so that the quantity of real monetary assets supplied will equalthe quantity of real monetary assets demanded:P US = Ms US/L (R$, Y US)P EU = Ms EU/L (R€, Y EU)
3 、Explaining the Problems with PPP
The failure of the empirical evidence to support the PPP and the law of one price is related to:1)Trade barriers and nontradables
2)Departures from free competition
3)Differences in measures of average prices for baskets of goods and servicesChapter 16
1.Tmporary Changes in Monetary and Fiscal PolicyTwo types of government policy:a)Monetary policy
i.It works through changes in the money supply.b)Fiscal policy
i.It works through changes in government spending or taxes.
Temporary policy shifts are those that the public expects to be reversed in the near future and do not affect the long-runexpected exchange rate.
Assume that policy shifts do not influence the foreign interest rate and the foreign price level.Monetary Policy
An increase in money supply (i.e., expansionary monetary policy) raises the economy’s output.
------The increase in money supply creates an excess supply of money, which lowers the home interest rate.
------As a result, the domestic currency must depreciate (i.e., home products become cheaper relative to foreign products) andaggregate demand increases.
Figure 16-10: Effects of a Temporary Increase in the Money Supply
Fiscal Policy
An increase in government spending, a cut in taxes, or some combination of the two (i.e, expansionary fiscal policy) raisesoutput.
The increase in output raises the transactions demand for real money holdings,which in turn increases the home interest rate.As a result, the domestic currency must appreciate.
Policies to Maintain Full Employment
Temporary disturbances that lead to recession can be offset through expansionary monetary or fiscal policies.Temporary disturbances that lead to over employment can be offset through contractionary monetary or fiscal policies.
2.Permanent Shifts in Monetary and Fiscal Policy
A permanent policy shift affects not only the current value of the government’s policy instrument but also the long-runexchange rate.
This affects expectations about future exchange rates.------A Permanent Increase in the Money Supply
A permanent increase in the money supply causes the expected future exchange rate to rise proportionally.
As a result, the upward shift in the AA schedule is greater than that caused by an equal, but transitory, increase (compare
point 2 with point 3 in Figure 16-14).
Adjustment to a Permanent Increase in the Money Supply
The permanent increase in the money supply raises output above its full-employment level.As a result, the price levelincreases to bring the economy back to full employment.Figure 16-15 shows the adjustment back to full employment.
------A Permanent Fiscal Expansion
A permanent fiscal expansion changes the long-run expected exchange rate.
If the economy starts at long-run equilibrium, a permanent change in fiscal policy has no effect on output.
It causes an immediate and permanent exchange rate jump that offsets exactly the fiscal policy’s direct effect on aggre gatedemand.
A temporary increase in the money supply causes a depreciation of thecurrency and a rise in output.
Permanent shifts in the money supply cause sharper exchange rate movements and therefore have stronger short-run effectson output than transitory shiftsChapter 17
1.Stabilization Policies with a Fixed Exchange Rate●Monetary Policy
Under a fixed exchange rate, central bank monetary policy tools are powerless to affect the economy’s money supply or itsoutput.●Fiscal Policy
-The rise in output due to expansionary fiscal policy raises money demand.（由财政扩张引起的产出增加增加货币需求）-To prevent an increase in the home interest rate and an appreciation of the currency, the central bank must buy foreignassets with money, thereby increasing the money supply).●Changes in the Exchange Rate1.Devaluation（币值下调）
a)It occurs when the central bank raises the domestic currency price offoreign currency, E.b)It causes:
A rise in output. A rise in official reserves. An expansion of themoney supply
c)It is chosen by governments to:Fight domestic unemployment.Improve the current account .
Affect the central bank‘s foreign reserves2.Revaluation（币值上调）
It occurs when the central bank lowers E.
3.In order to devalue or revalue, the central bank has to announce itswillingness to trade domestic against foreign currency, in unlimitedamounts, at the new exchange rate.
●Adjustment to Fiscal Policy and Exchange Rate Changes1. Fiscal expansion causes P to rise.（财政扩张引起价格上涨）1) There is no real appreciation in the short-run2) There is real appreciation in the long-run
2. Devaluation is neutral in the long-run. （本币贬值长期效⽤为中性）2、Benefits and Drawbacks of the Gold StandardBenefits:
1) It avoids the asymmetry inherent in a reserve currency standard.2) It places constraints on the growth of c ountries’ money supplies.Drawbacks:
1)It places undesirable constraints on the use of monetary policy to fightunemployment.
2)It ensures a stable overall price level only if the relative price of gold andother goods and services is stable.
3)It makes central banks compete for reserves and bring about worldunemployment.
4)It could give gold producing countries (like Russia and South Africa) toomuch power.Chapter 18
1.Mcroeconomic Policy Goals in an Open Economy
In open economies, policymakers are motivated by two goals:1)Internal balance: Full employment and Price level stability.
a)Under and over employment lead to price level movements that reducethe economy’s efficiency.
b)To avoid price-level instability, the government must:
Prevent substantial movements in aggregate demand relative to itsfull-employment level.
Ensure that the domestic money supply does not grow too quickly or tooslowly.
2)External balance: The optimal level(最优⽔平) of the current account(A current account level that is neither so deeply in deficit that the country
may be unable to repay its debts nor so strongly in surplus that foreigners are put in that position）Problems with Excessive Current Account Deficits:
They sometimes represent temporarily high consumption resultingfrom misguided government policies.
They can undermine foreign investors’ confidence and contributeto a lending crisis.
Problems with Excessive Current Account Surpluses:
- They imply lower investment in domestic plant and equipment.-They can create potential problems for creditors(债权⼈) tocollect their money.
-They may be inconvenient for political reasons.
-Several factors might lead policymakers to prefer that domesticsaving be devoted to higher levels of domestic investment andlower levels of foreign investment:–It may be easier to tax
–It may reduce domestic unemployment.
–It can have beneficial technological spillover effects2.Analyzing Policy Options under the Bretton Woods SystemAssume that: R = R*
Chapter 19
1.The Case for Floating Exchange Ratesa. Monetary Policy Autonomy
Floating exchange rates can restore monetary control to central banks and allow each country to choose its own desired long-run inflation rate.b. Symmetry
Floating exchange rates remove two main asymmetries of the Bretton Woods system and allow central banks abroad to beable to determine their own domestic money supplies and the U.S. to have the same opportunity as other countries toinfluence its exchange rate against foreign currencies.c. Exchange Rates as Automatic Stabilizers
Floating exchange rates quickly eliminate the “fundamental disequilibriums” that had led to parity changes and speculativeattacks under fixed rates.
2、The Case Against Floating Exchange Ratesa. Discipline
Floating exchange rates do not provide discipline for central banks.Central banks might embark on inflationary policies (e.g.,the German hyperinflation of the 1920s).The pro-floaters’ response was that a floating exchange rate would bottle upinflationary disturbances within the country whose government was misbehaving.b. Destabilizing Speculation and Money Market Disturbances
Floating exchange rates allow destabilizing speculation.Countries can be caught in a “vicious circle” of depreciation andinflation.Advocates of floating rates point out that destabilizing speculators ultimately lose money.Floating exchange ratesmake a country more vulnerable to money market disturbances.c. Injury to International Trade and Investment
Floating rates hurt international trade and investment because they make relative international prices more unpredictable.Exporters and importers face greater exchange risk.
International investments face greater uncertainty about their payoffs.
Supporters of floating exchange rates argue that forward markets can be used to protect traders against foreign exchange risk.The skeptics replied to this argument by pointing out that forward exchange markets would be expensived. Uncoordinated Economic Policies
Floating exchange rates leave countries free to engage in competitive currency depreciations. Countries might adopt policieswithout considering their possible beggar-thy-neighbor aspects.f. Uncoordinated Economic Policies
Floating exchange rates leave countries free to engage in competitive currency depreciations. Countries might adopt policieswithout considering their possible beggar-thy-neighbor aspects.
Chapter 20
1.The Theory of Optimum Currency Areas
The theory of optimum currency areas argues that the optimal area for a system of fixed exchange rates, or a commoncurrency, is one that is highly economically integrateda. Theory of optimum currency areas
It predicts that fixed exchange rates are most appropriate for areas closely integrated through international trade and factormovements
b. . Economic Integration and the Benefits of a Fixed Exchange Rate Area: GG Schedule Monetary efficiency gain
The joiner’s saving from avoiding the uncertainty, confusion, and calculation and transaction costs that arise when exchangerates float.
It is higher, the higher the degree of economic integration between the joining country and the fixed exchange rate area.GG schedule
It shows how the potential gain of a country from joining the euro zone depends on its trading link with that region.It slopes upward.
c.Economic Integration and the Costs of a Fixed Exchange Rate Area: The LL ScheduleEconomic stability loss:
The economic stability loss that arises because a country that joins an exchange rate area gives up its ability to use theexchange rate and monetary policy for the purpose of stabilizing output and employment.
It is lower, the higher the degree of economic integration between a country and the fixed exchange rate area that it joins.LL schedule:
It shows the relationship of the country’s economic stability loss from joini ng..It slopes downward.
Consider a recession in Spain alone: high unemployment and falling output. Previously Spain could use its monetary policy:increase money supply to lower interest rates, cheaper to borrow to buy car or build new factories, so stimulate demand forinvestment projects and consumption. This increased demand causes factories to produce more and hire more workers. Soraise GDP and lower unemployment.But now Spain cant do this on own. ECB decides on common monetary policy to suitdiverse interests of all the EU 11.Calculation
1.The Balance of Payments Accounts
2.National Income Accounting for an Open Economy3.Interest Parity
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