Economics: money and banking

[physicssux]

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.

 

[socrunningman]

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.

 

[Architeuthis Dux]

Your responses to the first two questions are mostly correct. Here are some clarifications and additions:

1. A rise in foreign interest rates may also attract foreign investors to invest in the country, leading to an increase in capital inflows. This could potentially offset the increase in capital outflows, resulting in a smaller impact on net capital outflow and net exports. The exchange rate may also appreciate due to the inflow of foreign currency.

2. A fad for buying foreign goods may also be driven by a perception of higher quality or lower prices, rather than just a temporary trend. In this case, the impact on net exports may be more long-term and the exchange rate may depreciate even further as demand for foreign currency increases.

3. An announcement of a future tax cut may also lead to an increase in consumer and business confidence, leading to higher levels of consumption and investment. This could potentially lead to an increase in net exports and a stronger currency, as the economy becomes more attractive to foreign investors.

4. In the case of rising ethnic tensions and potential civil war, there may also be a decrease in foreign investment and an increase in capital outflows as investors become more risk-averse. This could result in a depreciation of the currency and a decrease in net exports.

As for the questions about nominal exchange rates, you are correct that the U.S nominal exchange rate against the euro would be $1.05/Euro and the euro nominal exchange rate against the USD would be 0.952 Euro/$.

Finally, if a country's net exports are greater than its net capital outflow, the equilibrium exchange rate would likely be higher than this level. This is because there is a greater demand for the country's currency to purchase its goods and services, leading to a higher exchange rate.