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11 Cards in this Set
- Front
- Back
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Explain the three distinct notions of openness |
1. Openness in goods market 2. Openness in financial market 3. Openness in factor markets |
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Openness in goods market |
Trade restrictions include tariffs and quotas |
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Openness in financial markets |
Capital controls place restrictions on the ownership of foreign assets |
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Openness in factor markets |
the ability of firms to choose where to locate production and of workers to choose where to work |
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What are the differences b/w the real exchange rate and nominal exchange rate? |
- nominal exchange rate: the price of the foreign currency in terms of the domestic currency -real exchange rate: price of domestic goods relative to foreign goods |
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Discuss what factors could cause a real depreciation. |
A decrease in the relative price of domestic goods in terms of foreign goods. (you buy less units of foreign goods with one unit of U.S. goods) |
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Suppose you are considering the purchase of a bond issued in another country. What calculations must you do to calculate the expected return on a foreign bond? Explain. |
You must calculate the interest parity condition. The decision whether to invest abroad or at home depends not only on the interest rate differential, but also on your expectation of what will happen to the nominal exchange rate at maturity of the investment (expected appreciation or depreciation). |
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Explain what factors determine the expected return on a foreign bond. |
Depends on relative rates of return, which depends on domestic interest rates and foreign interest rates and on the expected rate of appreciation of the domestic currency. |
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Suppose the interest parity condition holds. Also assume that the one-year interest rate in the U.S. is 6% and that the one-year interest rate in Canada is 6%. What does this imply about the current versus future expected exchange rate (for the U.S. and Canadian dollars)? Explain. |
Any appreciation in one currency results in a depreciation of the other currency. |
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What is uncovered interest parity? Explain. |
It is the relation that states that if you hold bonds from two places they must have the same expected return. |
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Suppose the one-year nominal interest rate is 2.0% in the U.S and 5.0% in Canada. Should you hold Canadian bonds or U.S. bonds? Explain. |
If the Canadian bonds are going to depreciate by more than 3%, then you would want to hold U.S. bonds. But if they're going to depreciate less than 3% or appreciate, you'd want to keep the Canadian bonds. |
