Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

International trade and monetary systems > Final exam flashcards > Flashcards

Final exam flashcards

(108 cards)

Start Studying
1
Q

What is the formula for GNP?

A

The formula to calculate GNP is GNP = GDP + NFIA

NFIA represents net factor income from abroad, and it is the income earned by nationals abroad minus the income earned by foreigners domestically.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is the balance of payments?

A

The BoP (Balance of Payments) records all economic transactions between a country and the rest of the world.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What are the three main components of the BoP?

A

The current account

The capital account

The financial account

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is the current account?

A

The current account tracks trade balance, income flows, and transfers.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is the financial account?

A

The financial account covers FDI, portfolio investments (stocks, bonds), reserve assets (central bank foreign currency), and official borrowing (government loans).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What are debtor vs creditor nations?

A

A debtor nation owes more to the world than they own.

A creditor nation has more foreign assets than liabilities.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What are the short and long-run consequences of being a debtor nation?

A

In the short-run, borrowing can fuel investment and economic growth while attracting foreign capital inflows.

In the long-run, borrowing can cause a fiscal burden from interest payments, capital flight if investors lose confidence.

Additionally, currency depreciation makes debt repayment more expensive.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is the meaning of a surplus in the current account?

A

A current account surplus means a country is lending money to the world (more exports than imports).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is the meaning of a surplus in the financial account?

A

A financial account surplus occurs when a country attracts more investment from abroad than it invests in other countries.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is the meaning of a deficit in the current account?

A

A current account deficit means a country is borrowing from the world (more imports than exports).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is the meaning of a deficit in the financial account?

A

A financial account deficit means the country is investing more abroad than it receives from foreign investors.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What do countries with persistent current account deficits need to maintain economic stability?

A

Countries with persistent current account deficits need strong financial inflows to maintain economic stability.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

How do central banks manage a country’s balance of payments?

A

Foreign exchange reserves, which includes the central bank holding foreign assets to stabilise the economy.

Exchange rate interventions, which includes buying/selling foreign currency to influence the value of the domestic currency.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

How will a currency appreciation impact the current account?

A

It will likely worsen the current account because exports become more expensive and imports cheaper, reducing net exports.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

How will a currency appreciation impact the financial account?

A

It may improve the financial account as foreign investors are attracted by stronger returns in a more valuable currency, increasing capital inflows.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

How will a currency depreciation impact the current account?

A

It will likely improve the current account because exports become cheaper and imports more expensive, increasing net exports.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

How will a currency depreciation impact the financial account?

A

It may worsen the financial account as a weaker currency could reduce foreign investment due to lower returns or instability concerns.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What are the two types of exchange rate quotations?

A

Direct quotations are when the price of a unit of foreign currency is expressed in foreign currency. For example, one euro is worth 0.963 USD.

Indirect quotations are when the price of a unit of domestic currency is expressed in domestic currency. For example, one USD is worth 1.038 euros.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What three sources influence exchange rates?

A

Market forces.

Central bank policies.

Global economic conditions.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Why are exchange rates important?

A

Exchange rates affect trade prices, investment decisions, and competitiveness.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

How will a depreciation of a currency impact a trade policies within that country?

A

Cheaper exports, costlier imports, more foreign investment.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

How will an appreciation of a currency impact a trade policies within that country?

A

Costlier exports, cheaper imports, lower foreign investment.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Why is the US dollar the globally dominant currency?

A

It serves as a “vehicle currency”, meaning many international transactions are conducted in USD even if they do not involve the United States.

It ensures liquidy and price stability in global markets.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What economic indicators can be used to predict exchange rate movements?

A

Inflation rates

Trade balances

Interest rates

GDP growth

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Who are the key actors in the FX market?
Banks provide liquidity and trade; corporations use FX for business; funds trade for investment; central banks influence rates via policy.
26
What 2 main segments is the FX market divided into?
Spot market = immediate exchange Forward market = future exchange at locked rate.
27
What are the two types of currency?
Convertible currencies are freely traded in global markets and can be exchanged without restrictions. Examples include the USD and EUR. Non-convertible currencies are restricted by government policy. Examples of countries with non-convertible currencies include China, Argentina, Venezuela, Syria, ect.
28
What are NDFs?
NDFs are non deliverable forward contracts. These contracts simulate currency trading without requiring actual currency delivery. They are used to hedge against exchange rate risk, bypass government restrictions and/or follow compliance regulations.
29
Give an example of a NDF contract
Company A in the U.S. expects to receive CNY 10 million in three months but wants to lock in the exchange rate. The company enters into an NDF contract with a bank, agreeing to exchange CNY 10 million at a fixed USD/CNY rate of 7.00 in three months.
30
Using the above example, what happens when the NDF matures?
If the actual USD/CNY rate is 6.80, the company loses (since CNY strengthened). The bank compensates the loss in USD. If the actual USD/CNY rate is 7.20, the company gains (since CNY weakened). The company pays the difference in USD. The final settlement is made in USD - no actual CNY is exchanged.
31
What is money?
Money is any asset that is widely accepted as a means of exchange.
32
What are the four functions of money?
A medium of exchange, as it eliminates the inefficiencies of barter trade by facilitating transactions. A unit of account, as it provides a standard measure for pricing goods and services. A store of value, as it retains purchasing power over time, allowing people to save wealth. A standard of deferred payment, which enables contracts and credit transactions.
33
What are M1 and M2 in the money supply, and how do they differ?
M1 = Currency in circulation + checkable deposits. M2 is a broader measure, including less liquid forms of money than M1.
34
What three tools do central banks use to control money supply?
Open market operations (OMO). Reserve requirements. Discount rate.
35
What are open market operations (OMO), and how do they affect the money supply?
OMO involve buying or selling government securities. Buying increases money supply (adds liquidity). Selling decreases money supply (removes liquidity).
36
How do reserve requirements influence the money supply?
They determine how much money banks must keep in reserve. Higher requirements → less lending → smaller money supply. Lower requirements → more lending → larger money supply.
37
What is the discount rate, and how does it impact the money supply?
It’s the interest rate banks pay to borrow from the central bank. Higher rate → borrowing is costlier → less money in circulation. Lower rate → borrowing is cheaper → more money in circulation.
38
What is money demand?
Money demand refers to the desire to hold wealth in the form of money rather than other financial assets.
39
Why do people hold money?
People hold money for transactions, precautionary needs, and investment purposes.
40
What four factors influence how much money people choose to hold?
Interest rates. Risk. Liquidity. Income levels.
41
How do interest rates impact the opportunity cost of holding money?
When interest rates rise, the opportunity cost of holding money increases, so people hold less money. When interest rates fall, the opportunity cost decreases, so people hold more money.
42
What three reasons does Keynes identify for holding money?
Transactions motive, which means individuals hold money for everyday spending. Precautionary motive, which means individuals hold money for unexpected expenses. Speculative motive, which means individuals hold money to take advantage of future investment opportunities.
43
What determines interest rates in an economy?
Central banks manipulate money supply to influence borrowing, lending, and overall economic activity.
44
What is the equilibrium interest rate?
The equilibrium interest rate is the rate at which money supply and demand balance.
45
What are the short-run impacts of monetary policy?
In the short run: Prices and wages do not adjust immediately. Lower interest rates boost spending and investment. It can help stabilise the economy during recessions.
46
What are the long-run impacts of monetary policy?
In the long run: Prices adjust over time, reducing the impact of monetary policy on output. Money supply primarily affects inflation rather than real economic growth.
47
How does expansionary monetary policy affect interest rates and the currency?
It lowers interest rates, causing capital outflows and currency depreciation.
48
What are the inflation and trade effects of expansionary policy?
Expansionary policy increases demand, which can raise inflation. It often leads to higher imports due to increased consumption and may reduce exports if domestic prices rise or the currency strengthens, worsening the trade balance.
49
How does contractionary monetary policy affect interest rates and the currency?
It raises interest rates, attracting capital inflows and causing currency appreciation.
50
What are the inflation and trade effects of contractionary monetary policy?
It slows inflation, decreases exports, and increases imports due to a stronger currency.
51
What is the relationship between interest rates and inflation?
They are positively related: central banks raise interest rates to fight inflation by reducing spending and borrowing.
52
Why does low inflation lead to currency appreciation?
Investors view the currency as stable, increasing demand and attracting foreign capital.
53
What is exchange rate overshooting?
When a currency temporarily overreacts (stronger or weaker than expected) to interest rate changes before settling at equilibrium.
54
Why does overshooting happen?
Financial markets react quickly to interest rates, while trade and real economy adjust slowly.
55
What is the effect of exchange rate overshooting?
It causes short-term volatility in foreign exchange markets, creating uncertainty for businesses and investors.
56
What is the long-run neutrality of money?
It means that increasing the money supply raises the price level but does not affect real output in the long run.
57
Give an example of long-term money supply mismanagement and its effect on currency.
In the 2000s, Zimbabwe printed excessive money, causing hyperinflation and the collapse of its currency.
58
What does purchasing power parity (PPP) suggest about exchange rates?
That exchange rates adjust to equalise the price of identical goods across countries over time.
59
How does the Fisher Effect explain currency depreciation?
High inflation → high nominal interest rates (Fisher Effect) → but weak investor confidence → currency falls anyway.
60
What is the Fisher Effect formula?
Nominal interest rate = Real interest rate + Expected inflation
61
Give an example of a central bank using interest rates to manage exchange rates.
The ECB raised interest rates to fight inflation and slow euro depreciation, making assets more attractive.
62
Give an example of each exchange rate system.
Fixed: Hong Kong pegs to the USD. Floating: Mexico allows the peso to float freely. Managed float: China lets the yuan float but intervenes when needed.
63
How do economic sanctions affect a country’s exchange rate?
They reduce access to foreign capital, trigger capital outflows, and cause currency depreciation.
64
What other effects do sanctions have on the economy?
They limit trade, raise inflation, and reduce the central bank’s ability to stabilize the currency.
65
How did Russia respond to sanctions in 2022?
The central bank raised interest rates from 9.5% to 20%, imposed capital controls, and diversified exports to non-Western countries.
66
What is hyperinflation and its impact on a currency?
Hyperinflation is extremely rapid inflation that makes a currency worthless, leading people to use foreign currencies instead.
67
What causes hyperinflation?
Uncontrolled money supply growth, often due to excessive government spending or monetary mismanagement.
68
Give two examples of countries affected by hyperinflation.
Zimbabwe (2000s): Inflation hit 89.7 sextillion%, leading to currency collapse. Venezuela (2010s): Excessive money printing made the bolivar nearly worthless.
69
What is an overvalued currency?
An overvalued currency has a higher exchange rate than its "true" value (based on PPP).
70
What is an undervalued currency?
An undervalued currency has a lower exchange rate than its "true" value.
71
When is devaluation used?
It's used to boost exports, reduce trade deficits, or respond to economic downturns and high inflation.
72
When is revaluation used?
It’s often used to control inflation, manage capital inflows, or stabilize the economy during strong growth.
73
How will globalisation and emerging markets affect future exchange rates?
They will likely lead to greater currency fluctuations due to increased market integration, faster capital flows, and shifting global power dynamics.
74
What is the international monetary system?
It’s the framework of rules, institutions, and agreements that govern global economic coordination.
75
What happened during the interwar period?
Countries abandoned the gold standard to fund war, causing inflation and instability. Attempts to return failed, leading to currency wars and the Great Depression.
76
What was the Bretton Woods system (1944–1971)?
Currencies were pegged to the U.S. dollar. Institutions like the IMF and World Bank were established. This period aimed for stability, growth, and full employment.
77
Why did Bretton Woods collapse?
U.S. inflation and trade deficits made the dollar-gold peg unsustainable.
78
What is the role of the IMF today?
It gives aid, policy advice, and oversees exchange rates.
79
What does the World Bank do?
It funds long-term projects to reduce poverty and support development.
80
What are cryptocurrencies?
They are digital, decentralized currencies not controlled by states.
81
What are CBDCs?
They are digital versions of official currencies issued by central banks.
82
What is financial globalisation?
It's the growing integration of financial systems across borders.
83
What are the benefits/risks of financial globalisation?
Benefits: It boosts growth, improves capital allocation, and promotes investment. Risks: It increases contagion risk and requires strong global regulation.
84
What do international capital markets do?
They link savers and borrowers across countries to boost efficiency.
85
Name four benefits of capital market integration.
Higher efficiency Risk diversification Lower borrowing costs More innovation
86
What is the role of international banks?
They connect global savers and borrowers, and offer cross-border services.
87
What is shadow banking?
Shadow banking involves banking through unregulated financial entities.
88
Why are banks fragile?
They borrow short-term and lend long-term, risking liquidity shortages.
89
What caused Washington Mutual to fail?
It had too much exposure to risky mortgages and collapsed in 2008.
90
Why is international cooperation in finance important?
International cooperation is important because crises in one country can quickly spread worldwide.
91
What is the Basel Committee?
A group that sets global banking standards for capital and risk.
92
What is Basel III?
A post-2008 reform requiring more capital and liquidity buffers.
93
What is the Liquidity Coverage Ratio (LCR)?
A rule that requires banks to hold liquid assets for 30 days of stress.
94
What does the IMF do in crises?
It offers loans and policy advice to stabilize economies.
95
What does the Financial Stability Board (FSB) do?
It coordinates global financial regulation and watches systemic risks.
96
What caused Thailand’s 1997 crisis and how did the IMF respond?
The cause of the crisis was an overvalued currency, weak regulation, and rapid capital outflows. The IMF gave a bailout with strict reforms like spending cuts and rate hikes.
97
What is an Optimum Currency Area (OCA)?
A region where using a single currency brings more benefits than costs.
98
Give 4 OCA conditions
Labour mobility Economic similarity Financial integration Political unity
99
What was the EMS?
The European Monetary System (1979) introduced fixed exchange rates in the EU.
100
What did the Maastricht Treaty do?
It set rules for joining the euro, including limits on inflation and public debt.
101
When was the euro launched?
1999 for non-cash use; 2002 for physical currency.
102
What are the economic benefits of the euro?
Easier trade, price transparency, and stable exchange rates.
103
What are the political benefits of the euro?
Stronger EU identity and deeper integration.
104
What is the role of the ECB?
It sets eurozone monetary policy to keep inflation near 2%.
105
What is the Stability and Growth Pact (SGP) within the EU?
A rule that limits deficits to 3% of GDP and debt to 60% of GDP.
106
What did the 2008 crisis reveal?
The eurozone lacks tools to manage asymmetric shocks.
107
What triggered Greece's crisis and how was it handled?
Cause: Overspending, rule-breaking, and underreported debt. Resolution: €240B in bailouts tied to harsh austerity, causing deep recession.
108
Where does the Eurozone fall short of OCA criteria?
Labour mobility is low due to language and legal barriers. Wage flexibility is uneven and slow across members. Political integration is blocked by national interests.

International trade and monetary systems (2 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions