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BOP, Exchange rate - Coggle Diagram
BOP
CA
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Australia's persistent CA deficit= t the balances on net income and services have almost always been in deficit
current account deficit could be financed by other means,
Capital account
Consistent with the structure of CA:
transactions that bring in foreign exchange are recorded as credits.
transactions that lead to an outflow of foreign exchange are recorded as debits
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Exchange rate
Fixed ER
the level of ER are influenced by central bank and the government:
- crawling peg
- target zone
- or government intervene
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Speculative attack: massive selling of domestic currency asset by both domestic and foreign financial investors -> prompted by fear of devaluation of overvalued currency
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Maintain overvalued fixed ER:
- using international reserves
- restricting international trades
- or increase the equil thru MON POL
Increase domestic real interest -> assets are more attractive to foreigners, raising D and S of the currency
BUT mon pol is no longer used to stabilize the economy
Maintain undervalued fixed ER:
- Use domestic currency to buy foreign currency
- or decrease the equil thru easing mon pol
Real ER
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Real exchange rate= price of domestic good/ price of foreign goods in dollar
= eP/ Pf
P: price of the average domestic Gns
Pf: foreign price level-> price of the average foreign Gns
High real ER -> reduces X, increases M
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Mon pol
Closed economy: Mon pol affects AD thru real interest rate.
- In open economy with flexible ER, ER reinforces the effects of real interest rate ( ER affects X and M)
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Flexible or fixed:
- the effects of the exchange rate system on monetary policy
- the effects of the exchange rate system on trade and economic integration