Global Economics chapter ten

Question 0

Does scale of currency imply strength or weakness?

Answer 0

No

Question 1

The price of currency stated in terms of a second currency

Answer 1

Exchange rate

Question 2

To take Advantage of interest rate differentials

Answer 2

Interest rate arbitrage

Question 3

Three reasons to hold foreign currency

Answer 3

1. Trade to investment purposes
2. Interest rate arbitrage
3. Speculate

Question 4

Main participants in foreign exchange market

Answer 4

Customers, commercial banks, foreign exchange brokers, and central. Bank

Question 5

Currencies are constantly changing and as a result future payments are made and received in foreign currency will be different domestic currency amount from when signed contract

Answer 5

Exchange rate risk

Question 6

Market in which the buying and selling of currencies for future delivery takes place—avoid the risk that comes from exchange rate fluctuations

Answer 6

Forward market

Question 7

Price of currency that will be delivered in future

Answer 7

Forward exchange rate

Question 8

Market for buying and selling in the present

Answer 8

Spot market

Question 9

Use forward market to ensure against exchange rate risk

Answer 9

Covered interest arbitrage

Question 10

Buying a forward contract to sell foreign currency at the same time the interest bearing asset matures

Answer 10

Hedging

Question 11

Increase in demand under flexible or floating rate system

Answer 11

Causes appreciation in its value

Question 12

Decrease in demand of flexible or floating exchange rate

Answer 12

Depreciates value

Question 13

Value is held constant regardless of demand under a

Answer 13

Fixed rate system

Question 14

Increase in US demand for British pounds right shift in curve causes dollar to

Answer 14

Depreciate

Question 15

Increase in supply of British pounds to zuS market causes right shift and dollar to

Answer 15

Appreciate

Question 16

States that the equilibrium value of an exchange rate is at the level that allows a given amount of money to buy the same quantity of goods abroad that it would at home

Answer 16

Purchasing parity

Question 17

Exchange rates in medium major factors

Answer 17

Strength of economic growth is biggest factor—depreciating currency due to spending more and an outward shift in demand for foreign currency —opposite happens with recession spend less imports decline

Question 18

Exchange rates short run factor

Answer 18

Financial factors — capital flows affected by interest rates and exchange rates

Question 19

Interest-exchange rate relationship difference between any countries interest rates is approximately equal to the expected change in exchange rate

Answer 19

Interest parity

Question 20

Market exchange or nominal rate adjusted for price differences

Answer 20

Real exchange rate

Question 21

Real exchange rate calculated

Answer 21

Real exchange rate= nominal x foreign price/domestic price

Question 22

Strongest symbol of national sovereignty

Answer 22

Nations currency

Question 23

Reasons to share currency

Answer 23

1. Eliminates need to convert so reduces transaction costs
2. Simplifies accounting and bookkeeping
3. Enables consumers, investors to compare prices across international boundaries
4. Greater credibility

Question 24

Robert Mundel four conditions 1. Business cycle must be synchronized 2. High degree of capital and labor mobility between member countries 3. Regional policies capable of addressing imbalances that may develop 4. Seeking a level of integration beyond simple trade

Answer 24

Optimal currency areas