Midterm additional terms

Question 1

impossible trinity

Answer 1

ideal currency: exchange rate stability, full financial integration, monetary independence

Question 2

how is exchange rate stability achieved?

Answer 2

fixed exchange rate

Question 3

full financial integration

Answer 3

free movement of capital

Question 4

types of currency regimes

Answer 4

fixed, floating

Question 5

types of fixed currency rates

Answer 5

hard peg, soft peg

Question 6

examples of hard pegs

Answer 6

currency boards, dollarization

Question 7

hard peg

Answer 7

extreme currency regimes, giving up sovereignty for monetary policy

Question 8

soft peg

Answer 8

fixed exchange rates where authorities set band to another currency

Question 9

floating exchange regimes

Answer 9

market driven

Question 10

types of floating regimes

Answer 10

managed and free

Question 11

managed float

Answer 11

market driven with occasional government intervention

Question 12

free floating regimes

Answer 12

market driven, no government intervention

Question 13

national priorities as factors of currency regimes

Answer 13

inflation, unemployment, interest rate levels, trade balances, economic growth

Question 14

benefits of fixed rate regimes

Answer 14

stability, anti-inflammatory nature

Question 15

disadvantages of fixed rate regimes

Answer 15

central bank must maintain large quantities to defend fixed rate, sometimes inconsistent with economic fundamentals

Question 16

dollarization

Answer 16

USD as official currency

Question 17

benefits of dollarization

Answer 17

no currency volatility or currency crises, greater economic integration

Question 18

disadvantages of dollarization

Answer 18

loss of monetary policy, loss of seniority

Question 19

free floating regime

Answer 19

international market forces cause currency values to float up and down

Question 20

benefits of free floating regimes

Answer 20

free movement of capital

Question 21

disadvantages of free floating regimes

Answer 21

increased volatility and loss of stability

Question 22

what were the guiding pillars of the exchange rate regime during Gold Standard?

Answer 22

rules and independence

Question 23

what were the guiding pillars of the exchange rate regime during Bretton Woods?

Answer 23

rules and cooperation

Question 24

what are the current guiding pillars of current exchange rate regimes?

Answer 24

no rules and varying cooperation

Question 25

balance of payments

Answer 25

supply and demand of a country's products, services, assets

Question 26

purpose of balance of payments

Answer 26

measures economic transactions between residents of a country and foreign residents, help gauge nation competitiveness and health

Question 27

three elements of measurement of international economic activity

Answer 27

1. Identifying international economic transaction 2. Understanding how transaction creates debits and credits 3. Understanding bookkeeping procedures

Question 28

cash flow statement

Answer 28

continuing flows of purchases and payments between a country and all other countries

Question 29

balance of payments accounts analysis

Answer 29

current, capital/financial, net errors and omissions, official reserves

Question 30

current account

Answer 30

exports/imports, income, transfers

Question 31

capital account

Answer 31

real estate

Question 32

financial account

Answer 32

fdi, portfolio items

Question 33

balance given by current, capital and financial accounts

Answer 33

basic balance

Question 34

net errors and omissions account

Answer 34

missing data to give overall balance

Question 35

official reserves

Answer 35

government currency transactions e.g. foreign exchange, gold, IMF

Question 36

significance of official reserves

Answer 36

depends on fixed vs floating rate system

Question 37

capital mobility

Answer 37

Degree capital moves freely cross-border

Question 38

capital control

Answer 38

restriction that limits rate or direction of capital movement into or out of a country

Question 39

capital flight

Answer 39

rapid outflow of capital in fear of domestic political and economic conditions and policies

Question 40

where is capital flight common?

Answer 40

indebted countries

Question 41

how are supply and demand affected with fixed rate regimes?

Answer 41

demand increase causes supply increase to maintain rates

Question 42

how are prices affected in floating exchange rate regimes?

Answer 42

insecurity causes less investment, causing price decreases

Question 43

how is demand affected in countries with floating exchange regimes?

Answer 43

foreign currencies comparatively increase and exports rise

Question 44

law of one price

Answer 44

product's price should be the same in all markets if all else equal (no transaction costs and restrictions)

Question 45

absolute PPP determination

Answer 45

spot exchange rate is determined by comparing relative prices of similar goods e.g. Big Mac Index

Question 46

relative PPP

Answer 46

considers inflation differences

Question 47

higher price leads to

Answer 47

higher expected inflation

Question 48

fisher effect

Answer 48

Nominal interest rates equal required real rate of return plus compensation for expected inflation

Question 49

lower expected inflation means

Answer 49

currency value increases

Question 50

fisher effect

Answer 50

nominal rate moves with interest rate to ensure real rate stability

Question 51

international fisher effect

Answer 51

lower nominal rate = lower inflation rate = higher future currency value

Question 52

types of interest/exchange rates

Answer 52

covered, uncovered

Question 53

covered rates

Answer 53

locked with contract