Summary: Intermediate Macroeconomics, International Financial Relations

Read the summary and the most important questions on Intermediate Macroeconomics, International Financial Relations

• Lecture 1

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• Many multinational enterprises had established subsidiaries in Ireland. This results in Irish GNP to be higher than Irish GDP. True/false? Briefly explain.

  False, the profits of a subsidiary of a multinational are counted in Irish GDP but not in Irish GNP, so Irish GNP will be lower than Irish GDP.

• Many Bangladeshi workers are living and working in Saudi Arabia. This results in GNP of Bangladesh being higher than GDP of Bangladesh. True/false? Briefly explain.

  False, because they are living in Saudi Arabia, they are counted as Saudi Arabian residents.

• Lecture 2

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• What is quantitative easing? (QE)

  An unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. Quantitative easing is considered when short-term interest rates are at or approaching zero, and does not involve the printing of new banknotes.

• Imagine a temporary increase in money supply, what will happen with the price levels and expected exchange rate in the long run?

  A temporary change in money supply does not have an effect on price levels and expected exchange rate in the long run.

• What happens in the short run in case of a permanent increase in money supply?

  M/P will increase, so (M/P=L(R,Y)) R will decrease. The rate of return on a domestic asset will thus decrease, so the expected exchange rate will increase, which increases the expected rate of return on a  foreign asset (interest parity condition). So in the short run E will increase and overshoots long run E.

• What are asset-backed securities?

  Loans that are bundled and then sliced: stimulated by the ECB to increase investment.

• intermediate macroeconomics

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• high risk, demand for money

  equal to other assets

• Lecture 3

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• What are the assumptions of the monetary approach?

  • Prices are always flexible
  • Law of one price holds
  • Short run = long run
  • Money is neutral in both the long run and short run (monetary policy has no effect on output)

• What are the limitations/faults/problems of PPP?

  It does not hold in reality.
  
  Think of:
  

  • Trade barriers
  • Non-tradables
  • Pricing to the market
  • Different consumption patterns between countries

• What is the Fisher effect/Fisher's hypothesis?

  Domestic interest rate is driven by domestic expected inflation rate. (If expected inflation is high, R will also be relatively high.)