BOP Cheat Sheet (Tentative)
Showing posts with label Balance of Payments. Show all posts
Showing posts with label Balance of Payments. Show all posts
Saturday, January 4, 2020
Friday, July 6, 2018
Balance of Payments
Balance of Payments
If your pushed for time, remember this.
Remember
If there is a Surplus in the Current Account then there is a Deficit in the Capital Account.
&
If there is a Deficit in the Current Account then there is a Surplus in the Capital Account.
Thursday, November 10, 2016
2008 B Macro FRQ #2
2008 B Macro FRQ #1
(A) Will each of the following groups benefit from the decrease in the tariff rate?
(i) Mexican consumers
If the Mexican government reduces the tariffs (tax) on cars being imported from other countries then importers will be able to sell those cars for less. This means Mexicans will be able to buy cars at a cheaper price and be able to spend the surplus savings on other goods like, education, healthcare, entertainment, food, clothing. Yes, I would say that this is a benefit.
(ii) Mexican automobile manufacturers. Explain.
No Mexican automobile manufacturers would like tariffs to be higher not lower. If tariffs were higher then the Mexican manufacturers would be able to raise the prices of their domestically produced cars. Mexican automobile manufacturers would not benefit.
If tariffs are reduced then importers can charge less for each car. Consumers will be able to buy cheaper cars. Domestic producers of cars will have to lower their prices to compete with the imports.
(B) How would the decrease in the tariffs rate affect each of the following in Mexico?
(i) Current Account Balance. Explain.
We must first know what the Current account is.
If the current account balance is (imports & exports) goods and services.
If Mexico lowers its tariffs on automobiles imported then the price of imported automobiles will fall and more automobiles will be imported. Therefore their will be a current account deficit as imports will be increasing relative to exports..
(ii) Capital (financial) account balance.
If the current account is in a deficit, and therefore the capital account must be in a surplus.
Think of it like this - If you buy food from the grocery store you have imported goods into your household and therefore your current account is in a deficit. When you paid for the food you bought at the store that money is counted in the financial (capital account). The grocery store will take this cash and spend it at your advertising firm by buying your services.
When Americans buy cars from Germany our current account goes into a deficit but we paid for the cars with cash, and this cash will be used to buy property and goods from America.
(C) Given the change in Mexico's current account in part (B)(i), what will happen to the aggregate demand in Mexico.
If Imports increase then net exports must decrease and therefore AD will decrease as Net exports is a component of AD.
Wednesday, November 2, 2016
2008 Macro FRQ #2
2008 Macro FRQ #2
FOREX and Balance of Payments Cheat Sheet, Here.
(A) Two major sub accounts in the balance of payments are the current and the capital (Financial) account. IN which of these sub accounts will each of the following transactions be recorded?
(i) US resident buys chocolate from Belgium.
Current Account = Goods & Services
(ii) US manufacturer buys computer equipment from Japan.
Current Account = Goods & Services
(B) How would an increase in real income in the US affect the current account balance? Explain.
If Real incomes increase then we can expect citizens to import more goods and services. More goods and services will increase the current account but the Current Account Balance will go more into a deficit.
 |
| AD shifts right and RGDP increase, but incomes increase also Y1 to Y2. Why? If output increases then someone must have been hired to produce the extra output. That someone now has income (income increases nationally) and will marginally buy more imported goods. |
Remember - That an increase in incomes (Y) is aligned with an increase in RGDP as shown on the AD/AS curve.
(C) Using a CLG of the FOREX market for the US dollar, show how an increase in the US firm's direct investment in India will affect the value of the US dollar relative to the Indian rupee.
1. Use a FOREX graph of the $
2. US firms invest in India
3. What happens to value of the $
OK, for US firms to invest in India they must go to the FOREX market and buy Indian Rupee ₹
This implies that the demand for Rupee ₹ is increasing.
The value of the ₹ is increasing relative to the $.
 |
| The Supply of US $ is increasing as US firms dump their $ into the FOREX to buy Rupees ₹. As the supply of $ increases the value decreases. |
 |
| The Supply of US $ in the FOREX increases the Demand for US$ will decrease. As the supply of US$ increases the demand for US$ will decrease. |
If they had asked for the Graph drawn showing the Valuation of the ₹.
 |
| All of the Rupee symbols are not necessary, but it made me happy. |
Saturday, April 11, 2015
2012 Macroeconomics Exam FRQ #1
2012 Macroeconomics Exam FRQ #1
(a) Assume that Rankinland produces only food and clothing. Draw a correctly labeled PPC for Rankinland. Show a point that could represent the current output combination and label it A.
Remember, Rankinland is in Recession,, so all resources are not being utilized. Again,, recession usually means higher unemployment,, so the point A on the PPC represents, (or can represent) unemployment.
(b) Assume that the Central Bank of Rankinland pursues an expansionary policy.
(i) Identify the OMO, Open Market Operation that the central bank would use.
Expansionary fiscal policy,,, the OMO the central bank would use is the buying of bonds. When bonds are bought,, cash flows into the economy. The money supply is increased and nominal interest rates fall,, as interest rates fall, consumption (C) and investment (I) increase and therefore aggregate demand (AD) increases.
Ok,, so first,, if you have learned the graphs like I have,, then when AD increases then the PL Price Level increases also. But that is because I was taught the classical/monetarist graph that has an upward sloping aggregate supply curve.
This no price level change can (theoretically) happen if the recession is bad and we use the Keynesian aggregate supply curve.
So,, we have expansionary monetary policy with no PL change and we need to know what happens to the real interest rate.
If we understand that when the Fed buys bonds the Nominal Interest rate will fall and that with no price level change the nominal interest rate is the real interest rate then the Real interest rate must fall also.
As we can see,, the AD curve in the short run will increase and the R-GDP will also increase because an increase in the money supply will cause nominal interest rates to fall,, the lower rates will entice people to consume (C) and invest (I) which increases the AD therefore increasing (in the short-run) the R-GDP.
Why in the short-run???,,, because in the long-run we can be sure that prices will rise and rising prices will cause the demand for money to rise,, this will cause the Nominal interest rates to rise and that will decrease consumption (C) and Investment (I) and a decreasing of AD..
(c) Suppose Rankinland has a current account deficit. Rankinland's currency is called the Bera.
(i) What will initially happen to the current account deficit in Rankinland solely due to the change in real GDP from part (b) (iv). Explain.
First, you must know that a current account deficit is a situation where imports > exports. If there is more money being pumped into the economy by the central bank,, we can assume that more imports will be consumed. So the deficit will increase.
watch me answer it here
Watch me anser it here
(a) Assume that Rankinland produces only food and clothing. Draw a correctly labeled PPC for Rankinland. Show a point that could represent the current output combination and label it A.
Remember, Rankinland is in Recession,, so all resources are not being utilized. Again,, recession usually means higher unemployment,, so the point A on the PPC represents, (or can represent) unemployment.
(i) Identify the OMO, Open Market Operation that the central bank would use.
Expansionary fiscal policy,,, the OMO the central bank would use is the buying of bonds. When bonds are bought,, cash flows into the economy. The money supply is increased and nominal interest rates fall,, as interest rates fall, consumption (C) and investment (I) increase and therefore aggregate demand (AD) increases.
Answer - the central bank will buy bonds
(ii) Draw a CLG of the money market graph and show the short-run effects of the expansionary monetary policy on the nominal interest rate.
CLG - Correctly Labeled Graph,, nominal interest rate on the vertical axis,, and quantity of money on the horizontal.. MS for money supply shifting right (with arrows) and a decreasing of the nominal interest rate (with arrows) and a downward sloping demand for money curve.
(iii) Assume no change in the price level, what happens to the real interest rate, as a result of the expansionary policy,, Explain...
NO Change in the Price Level
Ok,, so first,, if you have learned the graphs like I have,, then when AD increases then the PL Price Level increases also. But that is because I was taught the classical/monetarist graph that has an upward sloping aggregate supply curve.
 |
| As AD increases the PL rises. |
|
| The Keynesian AS curve is viewed as horizontal during a recession and therefore that AD can increase with no Price Level changes |
Let us look at the cheat sheet.Monetary Policy Cheat Sheet
If we understand that when the Fed buys bonds the Nominal Interest rate will fall and that with no price level change the nominal interest rate is the real interest rate then the Real interest rate must fall also.
Answer - One point is earned for explaining that with the price level remaining constant, when the nominal
interest rate falls, the real interest rate also falls
(iv) Given your answer to part (b)(iii) regarding the real interest rate, what happens to the real gross domestic product (GDP) in the short-run? Explain.
Why in the short-run???,,, because in the long-run we can be sure that prices will rise and rising prices will cause the demand for money to rise,, this will cause the Nominal interest rates to rise and that will decrease consumption (C) and Investment (I) and a decreasing of AD..
Answer - One point is earned for stating that the real GDP will increase in the short run and explaining that
investment or consumption increases, causing aggregate demand to increase.
(i) What will initially happen to the current account deficit in Rankinland solely due to the change in real GDP from part (b) (iv). Explain.
First, you must know that a current account deficit is a situation where imports > exports. If there is more money being pumped into the economy by the central bank,, we can assume that more imports will be consumed. So the deficit will increase.
Answer - One point is earned for explaining that the increase in real GDP increases income, which causes
imports to increase and net exports to decrease.
(ii) What will happen to the international value of the Bera solely due to the change in the R-GDP from part (b) (iv). Explain.
If there is an increase in the money supply and more citizens spend money on imports,, then goods will come into the country and Bera's will go out. An increasing supply of Bera's in the international market will decrease their value.
FOREX Cheat Sheet
an increasing level of imports will increase the supply of Bera in the FOREX market which will lower the value of the Bera.
Answer - One point is earned for explaining that the decline in the international value of the bera is due to an
increase in the supply of the bera
Monday, April 6, 2015
2013 AP Macroeconomics Exam #1
2013 AP Macroeconomics Exam #1
1. Assume the US is operating at full employment.
(a) Using a CLG of the long-run aggregate supply, short-run aggregate supply, and aggregate demand, show each of the following.
(i) Current price level, labeled PL1
(ii) Current output level, labeled Y1
This first part should be automatic,, no real thinking,,,, they just want to see if you have memorized the graphs. You should be able to draw (at the drop of a hat) AD/AS curves for Equilibrium, recession, LR-recession, Inflation, LR-inflation, Stagflation, Growth and LR-Growth...
Check out the cheat sheets and practice. AD/AS Cheat Sheet
(b) Assume that personal savings in the US increases. Using a CLG of the loanable funds market, show the impact of the increase in personal savings on the real interest rate.
Straight forward question,, people save more and they deposit their cash in the commercial banks,, therefore the supply of loanable funds increase. If the Supply of loanable funds increase then the Supply of loanable funds curve shifts down (to the right) and the real interest rate decreases.
Loanable Funds Cheat Sheet
(c) Based on the real interest rate change in (b),
(i) Will interest sensitive expenditures, increase, decrease, or remain unchanged?
The use of the phrase interest sensitive expenditures is code for loans,,, so if we use different language could this question make more sense??
When the RIR (Real Interest Rate) falls will the number of people taking out loans, increase, decrease, or remain unchanged?
Answer - Interest sensitive expenditures will increase
(ii) What will happen to the rate of growth? Explain.
An increase of savings leads to a lowering of interstate rates that will encourage investment,, more investment leads to higher levels of capital formation (business plants, roads, construction, equipment, etc, etc) which leads to an expanding rate of growth in the economy.
Answer - growth rate will increase with an increase in capital formation.
(d) Assuming the real interest rate of the Euro Zone increases relative to the real interest rate of the US. Draw a CLG of the foreign exchange market for the Euro and show the impact of the change in the real interest rate in the Euro Zone in each of the following.
(i) Demand for the Euro. Explain.
If real interest rates are higher in the Euro Zone,, then US citizens wish to take advantage of the higher rates so they wish buy Euro Zone bonds (as these Euro Zone bonds are paying more than the US bonds) ,, to buy Euro Zone bonds they must exchange their US dollars for Euros. All of the US investors wishing to invest in Euro Zone bonds lead to a higher demand for the Euro.
Answer - Demand for the Euro increases because the higher real interest rate leads to higher returns for investors, thus US investors funds flow to the Euro Zone.
(ii) Value of the Euro to the US dollar.
Look at the graph, the value of the Euro is increasing,,, which also means the value of the dollar is decreasing,,, it will take more US dollars to buy a Euro as the values diverge.
(e) Assume that the US account balance is zero. Based on the change in value of the Euro identified in part (d) (ii), will the US current account be in surplus, deficit, or remain at zero?
As the Euro is increasing in value,, then the US goods and services will be cheaper ,, relatively to Euro goods and services,, and since the current account is about goods and services,, we would assume the US will be exporting more goods and services to the Euro Zone.
Answer - the US current account balance will be in surplus.
watch me answer it here
1. Assume the US is operating at full employment.
(a) Using a CLG of the long-run aggregate supply, short-run aggregate supply, and aggregate demand, show each of the following.
(i) Current price level, labeled PL1
(ii) Current output level, labeled Y1
This first part should be automatic,, no real thinking,,,, they just want to see if you have memorized the graphs. You should be able to draw (at the drop of a hat) AD/AS curves for Equilibrium, recession, LR-recession, Inflation, LR-inflation, Stagflation, Growth and LR-Growth...
Check out the cheat sheets and practice. AD/AS Cheat Sheet
(b) Assume that personal savings in the US increases. Using a CLG of the loanable funds market, show the impact of the increase in personal savings on the real interest rate.
Straight forward question,, people save more and they deposit their cash in the commercial banks,, therefore the supply of loanable funds increase. If the Supply of loanable funds increase then the Supply of loanable funds curve shifts down (to the right) and the real interest rate decreases.
Loanable Funds Cheat Sheet
(i) Will interest sensitive expenditures, increase, decrease, or remain unchanged?
The use of the phrase interest sensitive expenditures is code for loans,,, so if we use different language could this question make more sense??
When the RIR (Real Interest Rate) falls will the number of people taking out loans, increase, decrease, or remain unchanged?
Answer - Interest sensitive expenditures will increase
(ii) What will happen to the rate of growth? Explain.
An increase of savings leads to a lowering of interstate rates that will encourage investment,, more investment leads to higher levels of capital formation (business plants, roads, construction, equipment, etc, etc) which leads to an expanding rate of growth in the economy.
Answer - growth rate will increase with an increase in capital formation.
(d) Assuming the real interest rate of the Euro Zone increases relative to the real interest rate of the US. Draw a CLG of the foreign exchange market for the Euro and show the impact of the change in the real interest rate in the Euro Zone in each of the following.
(i) Demand for the Euro. Explain.
If real interest rates are higher in the Euro Zone,, then US citizens wish to take advantage of the higher rates so they wish buy Euro Zone bonds (as these Euro Zone bonds are paying more than the US bonds) ,, to buy Euro Zone bonds they must exchange their US dollars for Euros. All of the US investors wishing to invest in Euro Zone bonds lead to a higher demand for the Euro.
Answer - Demand for the Euro increases because the higher real interest rate leads to higher returns for investors, thus US investors funds flow to the Euro Zone.
(ii) Value of the Euro to the US dollar.
Look at the graph, the value of the Euro is increasing,,, which also means the value of the dollar is decreasing,,, it will take more US dollars to buy a Euro as the values diverge.
(e) Assume that the US account balance is zero. Based on the change in value of the Euro identified in part (d) (ii), will the US current account be in surplus, deficit, or remain at zero?
As the Euro is increasing in value,, then the US goods and services will be cheaper ,, relatively to Euro goods and services,, and since the current account is about goods and services,, we would assume the US will be exporting more goods and services to the Euro Zone.
Answer - the US current account balance will be in surplus.
Surprisingly Easy!
Friday, April 3, 2015
2014 AP Macroeconomics Exam FRQ #3
2014 AP Macroeconomics Exam FRQ #3
Even this guy could get a five.
Watch me answer it here,
3. The US and South Korea are trading partners, and the US has a zero current account balance. Assume now that the inflation rate in the US decreases relative to the inflation rate in South Korea.
(a) Based on the decrease in the inflation rate in the US, will US exports to South Korea increase or decrease?
Check the FOREX cheat sheet -
If the inflation rate (PL) in the US decreases,, the price level PL is falling,,, US goods are becoming cheaper and thus more affordable compared to South Korean goods. South Koreans import more US goods,,, the US exports more of its cheap goods to South Korea.
Answer - US exports increase
(b) Based on the change in the US exports in part (a) answer each of the following.
(i) Will the US current account balance remain at zero, be in surplus, or be in deficit.
FOREX - Cheat Sheet
Answer - if the current account is at zero,, and the US exports increase,, then exports will be greater than imports, so the US's current account balance will be in surplus.
(ii) What will happen to the real gross domestic product in the US in the short-run?
Answer - If exports increase, then AD will increase,, therefore the R-GDP will increase.
(c) The South Korean currency is the won. Draw a CLG of the foreign exchange market for the US dollar. Show the effect of the lower inflation rate in the US on the won price per US dollar.
If the US price level is falling, then US goods are getting cheaper relative to the South Korean goods, therefore the Koreans import more US goods. The S. Koreans trade won for US goods, therefore there is a surplus of won in the FOREX market,, the won's value decreases.
On the other side - the US exports goods, to be able to buy these US goods the S. Koreans must exchange their won for US dollars,, causing a higher level of demand for US dollars,, therefore the US dollar appreciates relative to the won.
The important part to recognize ion this question is that the college board is asking for the price of won per dollar... So the horizontal axis will be in dollars.
You could either show the above,, a demand increase or a supply decrease,, either will get you the points,, as long as they show the number of won per dollar to be increasing.
Answer - draw a CLG of the FOREX,, show (arrows) of a shifting right of the demand curve (increase) or a leftward shift of the supply curve (decrease),, and an increase of the won/dollar ratio.
I told you I would get a 5.
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