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Economics: money and banking

  1. Oct 12, 2009 #1
    How does each of the following affect a country's net capital outflow/net export/equilibrium exchange rate?

    1. a rise in foreign interest rates
    2. a fad for buying foreign goods
    3. an announcement that a tax cut will occur in the future.
    4. rising ethnic tensions that threaten to cause a civil war.

    and here is what i got, don't know if it's correct or not

    1.Capital outflows will increase as people invest overseas for better returns, net exports decrease, xchange rate depreciates with the selling of domestic currency for foreign currency to invest.

    2. short term increase in capital outflow to purchase fad good, net exports decrease heaps as goods are imported short term also, exchange rate depreciates as domestic currency is sold to purhase foreign currency to import good.

    3. People will act as if the tax cut has already come into effect, self fulfilling bs, same as no. 3 as people now have more disposable income, more likely to buy more goods, proably import them.

    4.foreign investor get scared, pull all their money out - outgoing capital flows increase, currency depreciates with all the money being pulled out, exports decrease as international agents likely to be apprehensive about taking risk and buying foreign goods.

    and also

    suppose $1.05 to buy 1 euro.

    What is the U.S nominal exchange rate against the euro? i got $1.05/Euro

    What is the euro nominal exchange rate against the USD? i got 0.952 Euro/$

    is this correct?

    and last one

    also, suppose at a certain real exchange rate, country's net exports > net capital outflow.

    is the equilibrium exchange rate higher or lower than this level to which i got:
    you are sending more out, so it costs more to buy your currency, higher, goes up

    HELP please, need advice + confirmation.
  2. jcsd
  3. Oct 14, 2009 #2
    This looks an awful lot like homework, if it is, I think you should look at policies for posting. Other than that we can break parts of this down and answer it over time.
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