practice round 1
Quiz yourself by thinking what should be in
each of the black spaces below before clicking
on it to display the answer.
Help!
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| exchange rate | the price of one currency in terms of another currency; for example, if the exchange rate for the Euro (€) is 132 Yen (¥), that means that each Euro that is purchased will cost 132 yen.
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| foreign exchange market | a market in which one currency is exchanged for another currency; for example, in the market for Euros, the Euro is being bought and sold, and is being paid for using another currency, such as the yen.
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| demand for currency | a description of the willingness to buy a currency based on its exchange rate; for example, as the exchange rate for Euros increases, the quantity demanded of Euros decreases.
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| appreciate | when the value of a currency increases relative to another currency; a currency appreciates when you need more of another currency to buy a single unit of a currency.
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| depreciate | when the value of a currency decreases relative to another currency; a currency depreciates when you need less of another currency to buy a single unit of a currency.
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| floating exchange rates | when the exchange rate of currencies are determined in free markets by the interaction of supply and demand
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| Current Account | Focuses on the difference between the total value of imports and exports of goods and services, the net factor income, and net cash transfers
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| Capital account | Focuses on the change in assets. (When someone outside the US buys assets in the US/When a US citizen buys foreign assets.)
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| Full balance of payments equation | Current account+Capital account=0
(CA+FCA=0)
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| Chinese Yuan and US dollar) When the Yuan depreciates... | In China, imports of US goods will decrease (US goods are more expensive for the Chinese). In the US, imports of Chinese goods will increase (Chinese goods are cheaper)
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| open economy | an economy that allows the exchange of both goods and assets with other countries
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| Why is the aggregate demand curve downward sloping? | The aggregate demand curve slopes downward because at a higher price level the purchasing power of consumers' wealth declines and consumption decreases.
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| Velocity of money | How many times a dollar changes hands in a year
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| Equation for the velocity of money | M x V= P x Y
M=Money supply
Y=Real GDP
P=Price level
V= Velocity of money
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| Money neutrality | The concept that an increase in the supple of money will only affect prices without impacting the real economy.
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| Monetarism | a way of analyzing the impact of monetary and fiscal policy actions based on the equation of exchange
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| explain what the equation of exchange is | a mathematical identity that describes the relationship between the money supply and nominal GDP
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| the quantity theory of money | an increase in money supply creates inflation and vice versa.
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| monetary policy | the use of the money supply to influence macroeconomic aggregates, such as output, inflation, and unemployment
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| expansionary monetary policy | monetary policy designed to increase aggregate demand, increase output, and decrease unemployment;
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| contractionary monetary policy | monetary policy designed to decrease aggregate demand, decrease output, and increase unemployment
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| open market operations | the buying and selling of securities, such as bonds, by a central bank to change the money supply
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