Work through the list without notes. If you cannot do a statement, follow its link, then come back. Guide = study guide; Practice = practice questions.
Understanding
- I can define financial capital and international capital flows, and tell financial capital apart from physical capital. (Guide: “Why financial capital moves between countries”)
- I can explain why financial capital flows towards the country with the relatively higher real interest rate. (Guide: “Why financial capital moves between countries”; Practice Q1)
- I can explain how a central bank’s short-run change in the interest rate, extra borrowing or a change in saving changes net capital inflows. (Guide: “What changes real interest rates”, Worked example 2; Practice Q6(a)–(b), Q7(a))
Calculation
- I can calculate real interest rates from nominal rates and expected inflation and use them to predict the direction of capital flows. (Guide: Worked example 1; Practice Q1, Q5(a)–(c))
- I can use CA + CFA = 0 to find the current account balance from the capital and financial account balance. (Guide: Worked example 2; Practice Q4, Q5(d))
Reasoning and graphs
- I can show on a foreign exchange market graph how a capital inflow makes a currency appreciate and an outflow makes it depreciate. (Guide: Figure 1(c); Practice Q2, Q6(c), Q7(b))
- I can show how a capital flow shifts the supply of loanable funds in both countries and explain why the real rates move closer together. (Guide: Figure 1(a)–(b); Practice Q3, Q6(e), Q7(d))
- I can carry the chain from a change in real interest rates through the exchange rate to net exports and aggregate demand. (Guide: “Writing the chain in an exam answer”; Practice Q6(d), Q7(c))
- I can explain why the exchange-rate effect of monetary policy works in the same direction as its effect on investment. (Guide: Worked example 2(d))
- I can explain why a foreign country’s policy can have effects on domestic aggregate demand that pull in opposite directions. (Practice Q7(e))
All ticked? This is the last topic of the course. Return to the course roadmap to review any unit, or go back to Topic 6.5 to practise the link to net exports.