Exchange rates and international capital flows ch16

A stronger euro is less favorable for: German tourists traveling abroad. American tourists traveling in France. Canadian firms selling in Germany. Canadian investors with money investments in Germany

American tourists traveling in France.

________________________ equalizes the prices of internationally traded goods across countries. The foreign exchange rate A floating exchange rate Purchasing power parity An international parity rate

Purchasing power parity

floating exchange rate

a country lets the value of its currency be determined in the exchange rate market

dollarize

a country that is not the United States uses the U.S. dollar as its currency

Short run speculation in currencies can create ________________________, at least for a time, where an expected appreciation leads to a stronger currency and vice versa. low inflation rates high inflation rates a self-fulfilling prophecy a decrease in the supply side

a self-fulfilling prophecy

portfolio investment

an investment in another country that is purely financial and does not involve any management responsibility

From a macroeconomic point of view, increases in ____________ are an addition to aggregate demand, while increases in ___________ are a subtraction from aggregate demand. rates of return; exchange rates exchange rates; rates of return exports; imports imports; exports

exports; imports

international capital flows

flow of financial capital across national boundaries either as portfolio investment or direct investment

People or firms use one currency to purchase another currency at the _______________________. international currency exchange foreign exchange market foreign currency exchange international parity market

foreign exchange market

If a government uses monetary policy to alter the exchange rate, then it cannot at the same time use monetary policy to address issues of ______________________. inflation or recession purchases or sales of foreign currencies how currency speculators react to rumors extreme short-term fluctuations

inflation or recession

Expansionary monetary policy lowers ______________, and increases demand for investment and consumer borrowing, which shifts aggregate demand to the ________________. interest rates; right rates of return; left rates of return; right exchange rates; left

interest rates; right

foreign direct investment (FDI)

purchasing more than ten percent of a firm or starting a new enterprise in another country

For firms engaged in international lending and borrowing, ____________________ can have an enormous effect on profits. swings in exchange rates trade-offs and risks foreign portfolio investment foreign direct investment

swings in exchange rates

If 1000 Mexican pesos could buy $1.00 U.S. dollar in 2006 and 87 U.S. dollars in 2010, then: the dollar depreciated against the peso. the peso appreciated against the dollar. the dollar strengthened against the peso. the peso strengthened against the peso.

the dollar strengthened against the peso.

purchasing power parity (PPP)

the exchange rate that equalizes the prices of internationally traded goods across countries

foreign exchange market

the market in which people use one currency to buy another currency

arbitrage

the process of buying a good and selling goods across borders to take advantage of international price differences

Exchange rates are an effective way to analyze the price of one currency in terms of another currency with _________________________. distinctive trade-offs and risks exchange rate policy monetary policy the tools of demand and supply

the tools of demand and supply

depreciating

when a currency is worth less in terms of other currencies; also called "weakening"

Which of the following is an example of a pegged currency? U.S. dollar British pound Euro Chinese yuan

Chinese yuan

Movements in exchange rates can have a powerful effect on incentives to export and import, and thus on ________________ in the economy as a whole. aggregate supply aggregate demand direct investments portfolio investments

aggregate demand

hard peg

an exchange rate policy in which the central bank sets a fixed and unchanging value for the exchange rate

soft peg

an exchange rate policy in which the government usually allows the exchange rate to be set by the market, but in some cases, especially if the exchange rate seems to be moving rapidly in one direction, the central bank will intervene

A central bank must be concerned about whether a large and unexpected ___________________________ will drive most of the country's existing banks into bankruptcy. exchange rate appreciation interest rate increase exchange rate depreciation increase in foreign investments

exchange rate depreciation

If a central bank focuses on preventing either high inflation or deep recession by using low and reasonably steady interest rate policy, then: foreign investment will increase significantly. exchange rates will have less reason to vary. domestic investments in foreign businesses will decrease. government will intervene to peg the nation's currency.

exchange rates will have less reason to vary.

hedge

using a financial transaction as protection against risk

A soft peg exchange rate may create additional _______________ as exchange rate markets try to anticipate when and how the government will intervene. volatility trade-offs demand side effects exchange rate zones

volatility

A depreciating U.S. dollar is ________________ because it is worth ___________ in terms of other currencies. strengthening; more weakening; less a problem for exporters; less beneficial to importers; more

weakening; less

appreciating

when a currency is worth more in terms of other currencies; also called "strengthening"

merged currency

when a nation chooses to use the currency of another nation