Econ340

Consider a two country model (home and foreign), where the money supply in home increases unexpectedly. Which of the following are reasons that exchange rate (home currency per unit of foreign currency) overshooting occurs after this unexpected event?

Foreign currency is expected to appreciate. Home interest rates decline. Prices are sticky in home.

Which of the following is NOT a function of the interbank part of the foreign exchange market?

Provides clearing services for organizations that prefer to use different currencies

What implications for international financial repositioning and for the current spot exchange rate would flow from a decrease in the expected future spot rate value of a country's currency?

Repositioning toward foreign currency assets results in this country's currency depreciating.

If the domestic interest rate rises, there will be international financial repositioning toward domestic-currency assets, thereby causing the domestic currency to appreciate.

True

The currency that is most often used to accomplish trading between two other currencies is the ____, which is often referred to as a vehicle currency.

U.S. dollar

When we look at a smaller collection (or subset) of the positive and negative entries from the balance of payments, the sum of these entries is commonly referred to as a:

balance

The set of accounts recording all of the flows of value between a nation's residents and the residents of the rest of the world during a specific period of time is called the:

balance of payments.

During the first phase of the crisis, the key issue was limited access to funding for:

banks and other financial institutions

The advent of international financial freedom has effects within each nation, whether borrower or lender, that are:

beneficial to some but harmful to others

Proposals for improving the "international financial architecture" that have received widespread support include:

better regulation and supervision of banks the pursuit by countries of sound macro policies the avoidance of short-term borrowing in foreign currencies improvements in the quality of reported data

A number of studies have concluded that uncovered interest parity fails to hold perfectly because market participants' expectations about future spot exchange rates are often:

biased

Covered Interest Arbitrage

buying a country's currency spot and selling that country's currency forward, to make a net profit from the combination of the difference in interest rates between countries and the forward premium on that country's currency

A government can fix the exchange rate of its currency by:

buying or selling its currency to keep the exchange rate in a pre-established range.

Which of the following are the categories into which international financial flows are conventionally divided into?

by type of lender or investor (private versus official) by presence of management control (direct versus portfolio) by maturity (long versus short) by type of borrower (private versus government)

During the post-1973 period of flexible exchange rates, the Japanese yen appreciated primarily because Japan's ____ rose and ____ than average.

real income; faster

Banks in the industrialized countries that received deposits (petrodollars) from oil-exporting countries sought to reinvest these funds, a problem better known as:

recycling

Debt that is due to be paid off relatively soon after it is acquired can cause a financial crisis if foreign lenders refuse to ___ it.

refinance

Nominal Bilateral Exchange Rates

regular exchange rates are the ones quoted in the foreign exchange markets

Consider the two countries US and UK, with the exchange rate given as dollars per pound. If incomes in both countries rise 10% above trend, relative PPP predicts that over time the UK pound will:

remain unchanged

Money-like assets that are held by governments and that are recognized by governments as fully acceptable for payments between them are called official international:

reserve assets

Capital Controls

restrictions on the ability of financial investors to transfer moneys in or out of the country

If American investors become more willing to invest in pound-denominated financial assets, then the demand curve for pounds will shift to the:

right

An increase in the demand for foreign currency will, given an unchanged supply curve, cause the exchange-rate value of the foreign currency to:

rise

Appreciation (under the floating-rate system)

rise in the market price of a currency

According the the exchange rate equation obtained from the combination of the absolute purchasing power parity equation and the quantity theory equations for the foreign and home economies, if the ratio of the variables linking money holdings to nominal GDP is constant, then a 1% rise in the home money supply causes the exchange rate (the price of foreign currency in terms of home currency) to ____ by ____%.

rise; 1

According to the exchange rate equation obtained from the combinations of the absolute purchasing power parity equation and the quantity theory equations for the foreign and home economies, if the ratio of the variables linking money holdings to nominal GDP is constant, then a 1% rise in foreign real GDP will cause the exchange rate to ___ by ___%.

rise; 1

Let the exchange rate denote the spot price of foreign currency in terms of domestic currency. If the foreign currency appreciates while both the domestic interest rate and the expected future spot exchange rate are constant, it can be deduced that the foreign interest rate has:

risen

Because the regulatory structure applied to regular banks did not fully extend to "shadow banks," the ____ importance of the latter meant that overall system regulation was ____.

rising; weakened

Unpredictable exchange rate changes impose what is referred to as exchange-rate ____ on individuals and organizations.

risk

Suppose a U.S. investor will receive a 50,000 pound payout on a UK investment in six months. To hedge its risk exposure the U.S. investor can enter a forward contract to:

sell 50,000 pounds in 180 days

For Mexico, the 1994-1995 financial crisis produced a:

severe recession

Regulation and supervision of the financial system was lessened overall by the increasing importance of ____ banks.

shadow

The second phase of the global crisis was characterized by:

sharply falling U.S. housing prices mass withdrawals from money market funds the freezing of financial markets a deepening of the U.S. recession

The single most important factor precipitating the developing country debt crisis of 1982 was the United States' decision to:

sharply increase interest rates

The asset market approach to exchange rates reflects the view of economists that the demands and supplies of assets denominated in foreign currencies best explains pressures on exchange rates in the ___ run.

short

Repayments (from the developing country debtors) that would have ended the debt crisis were slow in coming due to the debters':

slow economic growth poor access to international finance

As the debt crisis of 1982 unfolded, those banks holding small shares of all loans to developing countries:

sold off loans or got repaid

The crisis was eventually ended by a plan that enabled each debtor country to have some of its debt reduced and the remainder converted into:

special bonds

Individuals who wish to gamble on what exchange rates will be in the future will pursue:

speculation

The rate at which one country's currency is exchanged for another country's currency within two days after the exchange is agreed to is referred to as the:

spot exchange rate

Conclusion of the monetary approach to exchange rates

spot exchange rate is raised in the long run by a rise in our money supply relative to the foreign money supply and a rise in foreign real domestic product relative to our real domestic product

Standard IMF loans to assist a country in addressing its balance of payments problems are called ______ because the loans may or may not be used.

stand-by arrangements

When it comes to predicting exchange rates over long time horizons using the fundamentals stressed by PPP and the monetary approach, forecast errors are:

still rather large

As investors make shifts in their portfolios in response to a nonzero value of the expected uncovered interest differential (EUD), pressures are placed on the spot exchange rate and on the differential between home and foreign interest rates until incentives for shifts in investments.

subside

In the period since 1973 the extent of short-term variability in exchange rates has been:

substantial

The monetary approach to exchange rates is generally:

successful in explaining long-term exchange rates but not short-term exchange rates.

During the first phase of the crisis, The Fed undertook several steps to alleviate the situation, including:

successive cuts in its interest rate target the introduction of new liquidity sources currency swaps with foreign central banks

Since 1980, the world's biggest net borrower has been:

the U.S.

Speculating

the act of taking a net asset position (long) or a net liability position (short) in some asset class

Foreign Exchange

the act of trading different nations' moneys

Speculators' pressures on supply and demand should drive the forward exchange rate to equal:

the average expected value of the future spot exchange rate

Trade Balance

the balance on goods and services measures the country's net exports (goods merchandise trade balance)

If economic activities produce significant amounts of domestic pollution,

the cost of the pollution falls almost entirely on the people within the country producing the pollution.

The existence of an uncovered interest parity links together which of the following rates?

the current home interest rate the current foreign interest rate the current spot exchange rate the spot rate currently expected to exist in the future

Which of the following played a role in the surge in private lending to developing countries in the twelve years following the 1960s?

the developing world's distaste for foreign direct investment (FDI) the high propensity to save in the oil-exporting nations widespread pessimism about the profitability of capital formation in the industrialized countries a "herding" mentality among lenders toward lending to developing countries

Relative Purchasing Power Parity

the difference between changes over time in product-price levels in two countries will be offset by the change in the exchange rate over this time

Covered Interest Differential

the difference depends on the sign of the difference between the two returns

Vehicle Currency

the dollar

The Asian financial crisis of 1997 began in Thailand because:

the expectation of declining exports led to large declines in stock and real estate prices and put downward pressure on the local currency

If investors expect a decrease in the value of the South African rand vis-à-vis other currencies, their actions will cause:

the expected depreciation to occur much faster.

Absolute PPP holds for a product bundle if:

the law of one price holds for each of the goods in the bundle.

The Statistical Discrepancy

the net result of errors and omissions on both the credit and debit sides

Current Account Balance

the net value of flows of goods, services, income, and unilateral transfers

In the 1970s, private international lending to developing countries surged with the onset of:

the oil shocks

Triangular Arbitrage

the opportunity to make a riskless profit by arbitraging through three rates

Spot Exchange Rate

the price for "immediate" exchange

Exchange Rate

the price of one nation's money in terms of another nation's money

Exercise Price/Strike Price

the price set into the contract now for the foreign exchange transaction that the holder may make in the future

Lending to and investing in developing countries began to increase in 1990 for a variety of reasons, including:

the search by investors for new forms of portfolio investments low interest rates in the United States the increased attractiveness of developing countries the success of the Brady plan in ending the 1982 debt crisis

Balance of Payments

the set of accounts recording all flows of value between a nation's residents and the residents of the rest of the world during a period of time

Floating Exchange-Rate System

the simplest system without intervention by governments or central bankers

Exchange-Rate Risk

the value of the person's income, wealth, or net worth changes when exchange rates change unpredictably in the future

Nominal Effective Exchange Rate

the weighted-average spot-exchange-rate value of a country's currency

If the British government, through tighter monetary policy, reduced the supply of British pounds by 10%, we should expect that eventually:

there would be a 10% higher exchange rate value of the pound.

As demand for and supply of financial assets denominated in different currencies shift around:

these shifts place pressures on the exchange rates among the currencies

Decrease in expected future spot exchange rate

toward domestic currency assets and current spot exchange rate decreases

Decrease in foreign interest rate

toward domestic currency assets and current spot exchange rate increases

Increase in domestic interest rate:

toward domestic-currency assets and current spot exchange rate decreases

Increase in expected future spot exchange rate

toward foreign currency assets and current spot exchange rate increases

Increase in foreign interest rate

toward foreign currency assets and current spot exchange rate increases

Decrease in domestic interest rate

toward foreign-currency assets and current spot exchange rate increases

The concept of absolute purchasing power parity posits that a basket or bundle of ___ products will have the same cost in different countries if the cost is stated in the same currency.

tradable

Currency Swap

two parties agree to exchange flows of different currencies during a specified period of time

If an investor in foreign-currency denominated financial assets chooses not to utilize a forward contract to match his asset position, he is said to have a(n) _____ international investment.

uncovered

Investing in a financial asset denominated in a foreign currency without hedging or covering the future proceeds of the investment back into one's own currency is known as ___ international investment.

uncovered

The asset market approach to exchange rates utilizes the concept of ____ interest parity as its general analytical framework.

uncovered

In the period after 1990, developing countries became more attractive places to lend and invest because governments there:

undertook policy reforms

The balance of payments tracks flows of ____ into and out of a country.

value

After each shock, the financial system was afflicted with:

various forms of contagion a near stoppage to short-term lending

What are considered income flows in the balance of payments?

wages paid to foreign workers dividends paid to foreign investors interest received from foreign borrowers

What are the five major forces that can and do lead to financial crises?

waves of overlending and overborrowing exogenous international shocks exchange-rate risk fickle international short-term lending global contagion

Uncovered Interest Parity

when the expected uncovered differential equals zero, at least for the average investor

If a borrowing or lending country uses its market power to improve its well-being by imposing a tax on international lending, the other country (or countries) and the world as a whole will be:

worse off

You are an American and usually transact in dollars. If the only foreign currency position that you have is that you owe 10,000 Swiss francs for a custom watch that you ordered from Swatch:

you can hedge against exchange rate risk by obtaining a forward foreign exchange contract in which you will receive Swiss francs.

Currency Futures

you can lock in the price at which you buy or sell a foreign currency at a set date in the future

Everything else remaining unchanged, a decrease in interest rates in the United States is most likely to result in:

capital outflows into the United States.

The practice of borrowing a hard currency at a low interest rate, exchanging the funds into local currency, and lending at a higher interest rate is known as the ____ trade.

carry

Debt Scheduling

changes when payments are due; pushes the repayments schedule further into the future

Payments flow between individuals, businesses, and other organizations that prefer to use different moneys thanks to the ____ services provided by the spot foreign exchange market.

clearing

One purpose of a rescue package is the prevention of a crisis spreading to other countries. These spillovers are referred to as ____ effects.

contagion

The transmission of a financial crisis from one country to one or more other countries is referred to as a form of international ____.

contagion

The flow of funds to developing countries after 1990:

contained a sizable share of portfolio investment, unlike the 1970s flows

One influence upon the expected future expected exchange rate is recent trends in the actual spot rate. Some investors will merely extrapolate into the future what has recently happened. So, a currency that has been appreciating will be expected to:

continue to do so.

An agreement to exchange one currency for another on some date in the future is known as a forward exchange:

contract

The proposal that developing countries should use controls or impediments to capital inflows is:

controversial

The shock that initiated the first phase of the global crisis was the announcement by a French bank (BNP Paribus) that it:

could not accurately value its mortgaged-backed assets

If an investor in foreign-currency denominated financial assets utilizes a forward contract to match an asset position in those assets with a liability, she is said to have a(n) ____ international investment.

covered

_____ is buying a country's currency spot and selling it forward, while making a profit on the combination of the interest rate in that country and any forward premium on its currency.

covered interest arbitrage

When the exchange rate at which an anticipated foreign investment return will be redeemed is determined through a forward exchange contract, a(n) ____ results.

covered international investment

Foreign exchange is the act of trading different nations' _____.

currencies

A _____ contract allows someone to establish the price today at which he or she will buy a foreign currency at a specified future date.

currency futures

If an item in an international transaction results in a resident of a foreign country getting a monetary claim against a resident of the United States, then in the U.S. balance of payments that item is a(n):

debit item (or subtraction)

In international financial matters, _____ refers to the amount by which the debt obligations of a country exceed the present value of the payments that will be made to service that debt.

debt overhanging

Debt Restructuring

debt rescheduling and debt reduction

The two types of debt restructuring are:

debt rescheduling and debt reduction

Debt restructuring can take two forms:

debt scheduling and debt reduction

The amount of interest and repayment of principal that a borrower must pay during a period of time is called ____.

debt service

The U.S. is presently a very large ____ nation.

debtor

An exogenous shock that foments a developing country financial crisis might come from a sudden ____ in the country's export earnings.

decline

If the exchange rate denotes the spot price of foreign currency in terms of domestic currency, then an increase in the domestic interest rate (with all else constant) will cause the exchange rate to:

decrease

The rescue packages associated with the Russian and Argentinian crises are widely believed to have led a(n) ____ in moral hazard.

decrease

Let the exchange rate denote the spot price of foreign currency in terms of domestic currency. If the value falls and both the domestic interest rate and the expected future spot exchange rate are constant, then it can be determined that the foreign interest rate has:

decreased

If a country is a net borrower from the rest of the world, then its current account is in:

deficit

US capital outflows can generally be expected to create a ____ foreign currency and a ____ US dollars.

demand for supply of

When the United States imports goods, those imports create a(n):

demand for foreign currencies and a supply of U.S. dollars

According to the exchange rate equation obtained from the combination of the absolute purchasing power parity equation and the quantity theory equations for the home and foreign countries, if the foreign country has faster money growth and/or slower real output growth than the home country, its currency will:

depreciate

Countries with relatively high inflation rates have currencies whose values tend to ____ in the foreign exchange market.

depreciate

Consider the two countries US and UK, with the exchange rate given as dollars per pound. If incomes in the US rise 20% above trend, relative PPP predicts that over time the UK pound will.

depreciate by 20%

When the current spot exchange rate increases, domestic currency ____.

depreciates

Beginning in about 1990, lending to and investing in developing countries began to increase. One explanation for this is that:

deregulation and privatization in the developing countries opened up profitable new investment opportunities

If a country's government acts to reduce the fixed value of its currency, the change is called a(n):

devaluation

Which of the following is the most controversial proposed reform for the "international financial architecture"?

developing countries should make increased use of controls on capital inflows

Proposals for improving the "international financial architecture" that are somewhat controversial include:

developing country abandonment of efforts to fix or manage their currencies developing country adoption of permanently fixed exchange rates expansion of IMF authority to be an international lender of last resort the abolition of the IMF

In the quantity theory equation, the demand for money is assumed to be ____ proportional to the money (or nominal) value of GDP.

directly

The view that capital controls can reduce the risk of financial crises is rooted in the belief that controls will:

discourage short-term borrowing prevent overlending and overborrowing reduce the chance of contagion

For many products, the law of one prices:

does not hold closely

One direct way to speculate on the value of the future spot exchange rate is a ____.

forward foreign exchange contract

The difference between the current forward exchange rate value of a currency and its current spot exchange rate value is identified as the:

forward premium

In shifting from no international lending to barrier-free, well-behaved international lending, lender countries would ____ and borrower countries would ____.

gain; gain

Currency Option

gives the buyer of the option the right, but not the obligation, to buy foreign currency or to sell foreign currency at some time in the future at a price set today

The Russian Financial Crisis was precipitated by rapid increases in the debt of its:

government

What are examples of unilateral transfers?

government grants of aid to foreigners private charitable gifts to foreigners migrants' remittances to relatives abroad

What are reasons why the law of one price fails to hold for most products?

governments do erect trade barriers transports costs are not negligible many markets are imperfectly competitive

If an American investor seeking to convert present dollars into future dollars chooses to invest in the UK even though (iuk<ius), then we can surmise that the forward premium on the pound is positive and ____ than the absolute value of the interest differential (iuk-ius) between the two countries.

greater

The law of one price works well for:

heavily traded commodities

The law of one price works well for ___ but does not hold for ___.

heavily traded commodity products; manufactured products

Large Company is a candy manufacturer and one of the ingredients that it uses is cocoa. It is deeply concerned with the market price fluctuations of cocoa. To protect this, it enters into a contract that would allow the company to buy cocoa at a specific price at a given future date. This is an example of:

hedging

Some individuals who have acquired exposures to exchange-rate risk seek to reduce or eliminate these exposures through____.

hedging

When an investor reduces or eliminates a net asset or net liability position in a foreign currency to reduce risk exposure, that investor is:

hedging

In the period following the world's shift to managed floating exchange rates in the early 1970s, the evidence suggests that covered interest parity:

held reasonably well

Long Positions

holding net assets in the foreign currency

Bubble

if the resulting movement in the exchange rate appears to be simply inconsistent with any form of economic fundamentals

Quantity Theory Equation

in a country the money supply is equated with the demand for money, which is directly proportional to the money value of gross domestic product

When a country fails to make payments as specified in its debt agreements, it is:

in default

Suppose it is widely believed among those inclined to speculate that the EU euro will appreciate over the next 3 months (its spot price in 90 days will be higher than today's spot price). In this case, the actions of the speculators will cause the forward price of the euro to ____ from its present value.

increase

The lending boom in the U.S. and elsewhere caused real estate and other asset prices to sharply ____.

increase

The rescue package granted during the Mexican crisis of 1994-1995 probably led to a(n) ____ in moral hazard.

increase

When a resident of Germany buys a U.S. Treasury bond, there will be a(n):

increase in the demand for U.S. dollars.

An increase in the U.S. exports of goods and services will result in a(n) _____ foreign currency and a(n) _____ U.S. dollars in the foreign exchange market.

increase in the supply of; increase in the demand for

During the several years leading up to the global crisis, housing prices in the U.S.:

increased sharply

Beginning in 2007, mortgage-backed financial securities began to generate losses for their owners as a result of:

increasing defaults on sub-prime mortgages

The global financial and economic crisis arose in the ____ countries.

industrialized

Moral Hazard

insurance leads the insured to be less careful because the insurance offers compensation if bad things happen

____trade is when a lender gives up resources (money) today in order to get more resources (amount loaned plus interest) in the future.

intertemporal

Bandwagon

investors may expect that the recent trend in the exchange rate will continue

If a country's net foreign investment is positive, that country:

is acting as a net lender to the rest of the world

Short-term debt is especially risky for borrowing countries because:

it is usually refinanced rather than being paid off so countries with short-term debt have to find a lender willing to refinance that debt when it comes due.

The ____ is based on the idea that a product that is freely traded in a competitive global market should have the same price everywhere if the prices at different places are expressed in the same currency.

law of one price

The notion that a product that is easily and freely traded in a perfectly competitive market should have the same price everywhere (once the prices are expressed in the same currency) is called the:

law of one price

If international financial transactions are prohibited:

lenders in the richer countries will probably earn low rates of return

In the immediate aftermath of the onset of the 1982 debt crisis, larger banks (those holding large shares of all loans) sought to assist the developing country debtors by:

lending smaller amounts of new money rescheduling loan payments

Which of the following resulted in a surge in international lending to developing countries in the mid-1970s to early 1980s?

lending to developing countries gained momentum through "herding" behavior

When we look at a smaller collection (or subset) of the positive and negative entries from the balance of payments and the "balance" of these entries is in deficit, we know that the sum of positive entries is ____ than the sum of the negative entries.

less

Developing nations would not agree at Kyoto in 1997 to:

limit greenhouse gas emissions

Central bank actions during the first phase of the crisis had ____ positive effects, with conditions in financial markets ____.

limited; remaining unsettled

Rescue Package

loan commitments to assist in getting through a financial crisis

The available real world evidence suggests that relative PPP holds reasonably well in the ___-run but rather poorly in the ___-run.

long; short

Debt Reduction

lowers the amount of debt

An IMF rescue package agreed to in 2000 was suspended in shortly afterward because the Argentinian government failed to:

make improvements in its policies

In the application of the quantity theory equation to the analysis of exchange rates in the long run, we assume that each country's money supply is controlled by each country's ____ policy alone.

monetary

The approach to exchange rates in the long run rests fundamentally on the belief that national price levels (or inflation rates) are strongly linked to national:

money supplies

By combining the absolute purchasing power parity equation with the quantity theory equations for any two countries, we can make exchange rate predictions based upon:

money supplies and national products

If a company or country with insurance against a certain kind of loss is less careful with regard to that loss than it would normally be because the insurance will pay in the event of a loss, we have an example of:

moral hazard

Even though an uncovered foreign financial investment is exposed to exchange-rate risk, it may nevertheless be appealing to an investor if the heightened risk it individually adds to his portfolio is ___ than offset by the decline in overall risk it yields due to the diversification it brings to the investor's portfolio.

more

What are the reasons why the use of economic models to predict exchange rates are so difficult?

news produces strong and immediate reactions expectations only weakly depend on economic fundamentals

Divergences from absolute PPP are exacerbated when ____ goods are included in the product bundles.

nontraded

Consider a simple two country (home and foreign) model. If both foreign and home increase their money supplies by 10% while all else remains constant, relative PPP predicts that over time the exchange rate will

not change

The concept of relative purchasing power parity asserts that the difference between changes over time in the price levels in two countries will be ____ by the change in the exchange rate over this time.

offset

In the classification of international financial flows by maturity, long-term refers to periods in excess of:

one-year

The interbank part of the foreign exchange market involves banks trading with ____ in foreign exchange.

other banks

Many of the developing countries of Southeast and East Asia had currencies whose real exchange-rate values were:

over-valued

The excessive lending/borrowing that can lead to a financial crisis is sometimes called debt ____.

overhang

The tendency of international investors to drive the actual (short-run) exchange rate past the value they know to be its long-run equilibrium is known as ____.

overshooting

Short Positions

owing more of the foreign currency than one holds

Toward the end of 2007, U.S. stock prices ____ and the U.S. economy experienced the onset of ____.

peaked; recession

The market exchange rate is a(n) ____ way to compare average income and production levels because the purchasing power parity hypothesis ____.

poor; is not reliable when applied to the goods and services that make up national expenditures or domestic production

As a general rule, the strengthening of bank regulation should ____ the provision (to banks) of easier access to foreign currency exposures.

precede

The proportionate difference between the current forward exchange-rate value of a foreign currency and its current spot value is called the forward ____.

premium

Forward Premium

proportionate difference between the current forward exchange-rate value of the currency and its current spot value

Collective Action Clauses

provide that a qualified majority (75%) can bind all bondholders to the terms of restructuring agreement require that all payments and recoveries from the issuer be shared evenly among the bondholders mandate that there can be no legal action against the issuer unless a minimum portion (25%) of bondholders agree to the suit

If Peruvian speculators expect the euro to appreciate against the U.S. dollar, they would:

purchase euros

Because a country's national saving is used to fund both domestic investment and net foreign investment and since the current account balance must equal net foreign investment, it follows that national saving not invested at home equals the ____ account.

current

National Saving Formula

domestic real investment + net foreign investment

Because of double-entry bookkeeping, the sum of all of the items (or entries) in a country's balance of payments must:

equal zero

The price of one nation's money in terms of another nation's money is an ____ rate.

exchange

Within certain constraints imposed by the nature of the foreign exchange regime under which a country operates, the supply and demand for foreign exchange will determine the:

exchange rate

When we look at smaller collections (or subsets) of the positive and negative entries from the balance of payments, the sum of these entries:

can be positive, zero, or negative

An item for which the country must be paid and which is measured with a positive sign is a ____ item.

credit

When a foreign resident increases his or her holding of a U.S. financial asset, then it is considered as a ____ in the financial account of the U.S.

credit

Depreciation (under the floating-rate system)

fall in the market price (exchange-rate value) of a currency

Most of the world's major currencies today have ____ rates relative to each other.

floating

The simplest foreign exchange rate system, one without intervention by governments or central bankers, is a ____ system.

floating rate

Importation of goods into a country, purchases by firms in a country of services from firms outside the country, and purchases by investors in a country of equity interests in a corporation outside of the country are all examples of:

funds flowing out of the importing or purchasing country.

If the country has a current account deficit, then its foreign liabilities are growing faster than:

its foreign assets

If the country has a current account surplus, then its foreign assets are growing faster than:

its foreign liabilities

Current Account Balance Formula

national saving minus domestic investment

If a country has a current account deficit, then the net value of the flows of goods, services, income, and gifts between it and the rest of the world is _____.

negative

If the country has a current account deficit, its net foreign investment is ____ and is acting as a ____ _____ from the rest of the world.

negative net borrower

The country's current account balance must equal:

net foreign investment

The most widely used indicator of whether a country's balance of payments has achieved a sustainable pattern over time is the ____ balance.

official settlements

A country's ____ is the country's current account balance plus its (nonofficial) financial account balance.

official settlements balance

Fixed Exchange-Rate System

officials strive to keep the exchange rate virtually fixed (or pegged) even if the rate they choose differs from the current equilibrium rate

If a country has a current account surplus, then its foreign investment is:

positive

If the country has a current account surplus, its net foreign investment is _____ and is acting as a ____ ____ to the rest of the world.

positive net lender

The market clears itself through the _____ _____.

price mechanism

For the U.S., it is generally assumed that much of the statistical discrepancy is due to the under-measurement of:

private capital flows

If a government finds that its currency has become substantially overvalued at its fixed rate relative to the market-clearing rate, then in a fixed exchange-rate system it must ____.

purchase its currency

With the exception of three brief periods between the early 1960s and 1980, the current account balance for Japan has been in:

surplus

Expected Uncovered Interest Differential

+ then the expected overall return favors uncovered investing in a pound-denominated asset - then the expected overall return favors staying home

If a British pound equals 1837 South Korean won (the currency of South Korea), what is the British pound equivalent of a South Korean won?

0.00054 British pound.

What are the common dates forward for the future exchange of currencies?

180 days 90 days 30 days

During the 1980 to 1985 period, the US dollar appreciated to the point that it was ____% above its 1970 value.

20

If the law of one price holds, then we would expect that if one dollar exchanges for four yen and if a computer costs $1,000 in the United States, then in Japan, the computer should cost:

4000 yen

The "fickleness" of international short-term lending played a part in a number of recent crises, including the:

Asian crisis of 1997 Mexican crisis of 1994-1995

Which of the following is the least accurate statement about purchasing power parity (PPP)?

PPP predicts most accurately when looking at the largest measure of price levels such as all products in the GDP.

The center of global foreign exchange trading is:

London

In the EU, the ____ set a process that has resulted in the adoption of the euro as the currency of more than half of the EU countries.

Maastricht Treaty

For an investor who starts with dollars and wants to end up with dollars in the future, which of the following choices is an example of an uncovered international investment?

Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and then buy dollars at the future spot rate.

Which of the following countries decided not to be bound by the Kyoto Protocol?

The United States

Which of the following contributed to the Asian crisis?

The local borrowers in the Asian countries scrambled to sell local currency to establish hedges against exchange rate risks.

The Mexican financial crisis was brought to a rather speedy resolution largely due to a rescue package arranged by the ____ that permitted the Mexican government to ____.

United States; borrow needed funds

Eurocurrency Deposit

a bank deposit denominated in a currency different from the currency of the country where the bank is located

Absolute Purchasing Power Parity

a basket or bundle of tradable products will have the same cost in different countries if the cost is stated in the same currency

Covered Interest Parity

a currency is at a forward premium (discount) by as much as its interest rate is lower (higher) than the interest rate in the other country; the overall covered return on a foreign-currency investment equals the return on a comparable domestic-currency investment

An appreciation of the U.S. dollar refers to:

a decrease in the dollar price of a foreign currency

Covered International Investment

a hedged contract

Hedging

a position exposed to rate risk, here exchange-rate risk, is the act of reducing or eliminating a net asset or net liability position in the foreign currency

Law of One Price

a product that is easily and freely traded in a perfectly competitive global market should have the same price everywhere, once the prices at different places are expressed in the same currency

The exchange-rate value of a foreign currency is raised in the short run by:

a rise in the foreign interest rate relative to our interest rate and a rise in the expected future spot exchange rate

The _____ exchange rates recognizes that as demand for and supply of financial assets denominated in different currencies shift, the shifts place pressure on the exchange rates among the affected currencies.

asset market approach to

The empirical evidence shows that absolute PPP holds ____ the law of one price.

about as poorly as

A bank that is active in the Eurocurrency market will:

accept interest-paying deposits in a number of different currencies.

If an investor engages in uncovered international financial investment, he is ___ an exposure to foreign exchange-rate risk.

accepting

Forward Foreign Exchange Contract

an agreement to exchange one currency for another on some date in the future at a price set now

Uncovered International Investment

an unhedged contract

Countries with relatively low inflation rates have currencies whose values tend to ____ in the foreign exchange market.

appreciate

If international financial investors revise upward their expected future exchange rate, (of foreign currency in terms of domestic currency), while foreign and domestic interest rates are constant, then the current spot exchange rate will:

appreciate

If the exchange rate denotes the spot price of foreign currency in terms of domestic currency, then an increase in the domestic interest rate will cause the domestic currency to:

appreciate

Consider the two counties US and UK, with the exchange rate given as dollars per pound. If incomes in the UK rise 10% above trend, relative PPP predicts that over time the UK pound will.

appreciate by 10%

When the current spot exchange rate decreases, domestic currency ___.

appreciates

Buying a country's currency spot and selling it forward to make a net profit from the combination of that currency's forward premium and a relevant interest differential is known as covered interest ____.

arbitrage

The primary demand for money is:

as a medium of exchange.

WTO rules allow countries to restrict the importation of products that the country maintains cause harm to the environment or to the citizens of the country:

as long as the measures to limit environmental damage or damage to the country's citizens apply equally to both domestic and imported products. check

While the causes of changes in short-term floating exchange rates are difficult to determine, long-term changes in floating exchange rates are related to:

economic fundamentals.

Monetary Approach to Exchange Rates

emphasizes the importance of money supplies and demands as key to understanding the determinants of exchange rates

Asset Market Approach to Exchange Rates

emphasizes the role of portfolio repositioning by international financial investors

If a bank borrows money in a foreign currency and uses that money to make loans in its domestic currency, in addition to the financial risk involved, the bank also takes a(n) ____ risk.

exchange rate

If a person's or firm's financial welfare can be affected by changes in the value of one currency in terms of another currency, that person or firm is exposed to a(n)____ risk.

exchange rate

Hong Kong has a(n):

exchange rate fixed to the U.S. dollar

The U.S. economy in the several years prior to the onset of the global crisis was characterized by:

expansionary monetary policy low inflation strong economic growth

If the spot exchange rate is "dollars per pound" and i(uk) and i(us) denote interest rates in the UK and US, then the expected appreciation (depreciation if negative) of the pound plus the interest differential (i(uk) - i(us)) can be employed to approximate the:

expected uncovered interest differential

A(n) _____ exists when an activity brings direct losses to people who are not involved in the decision to conduct that activity.

external cost

The rescue package arranged to assist the Russian government from the burden of its massive debt was blocked by the IMF because the Russian government:

failed to implement fiscal reforms

According to the exchange rate equation obtained from the combination of the absolute purchasing power parity equation and the quantity theory equations for the foreign and home economies, if the ratio of the variables linking money holdings to nominal GDP is constant, then a 1% rise in domestic real GDP will cause the exchange rate to ___ by ___%.

fall; 1

Let the spot exchange rate denote the price of foreign currency in terms of domestic currency. If the value rises and both the foreign interest rate and the expected future spot exchange rate are constant, then it can be deduced that the domestic rate of interest has:

fallen

If the exchange rate of a currency is determined by the foreign exchange market without the intervention of government, the exchange rate system is known as a(n) ____ exchange rate system.

floating

Purchasing power parity predicts that when the U.S. inflation rate increases relative to the inflation rate of another country, the:

foreign currency should appreciate

Because most exporters want to be paid in the currency of their home country, exports of goods generally cause:

foreign currency to be sold to buy the currency of the country that exports the goods

Consider a simple two country (home and foreign) model. If foreign decreases its money supply by 10% while all else remains constant, relative PPP predicts that over time the ___ currency will ___ by 10%.

foreign; appreciate

Credit Term

(+) an item for which the country must be paid; sets up the basis for a payment by a foreigner into the country (monetary claim on a foreigner)

Debit Term

(-) an item for which the country must pay; sets up the basis for a payment by the country to a foreigner (monetary claim owed to a foreigner)

The Official Settlements Balance plus Official Reserves must equal

0

If the exchange rate between the US dollar and the UK pound is quoted as $2.50 per pound, the alternative (or second) way to give the exchange rate is:

0.4 pound per 1 dollar

Rates for inter-bank currency trades are for amounts of _____ or more.

1 million

What is a capital transaction items is entered as a debit in the U.S. balance of payments?

A Spanish resident transfers the equivalent of $100 from his account at Bank America in Chicago to his Credit Suisse account in Basel (Switzerland).

A country's current account balance:

Equals the country's net foreign investment; Is approximately equal to the difference between the country's national saving and its domestic real investment; Is approximately equal to the difference between the value of the country's domestic production of goods and services and the country's expenditures on goods and services

If an Italian investor sells U.S. government securities to a U.S. buyer, how will this item be entered in the balance of payments?

It will appear in the financial account as a decrease in the US assets held by foreigners.

Arbitrage

Process of buying and selling to make a nearly riskless pure profit; ensures that rates in different locations are essentially the same and constant

If a government finds it necessary to intervene in the market for its currency by selling its currency, then market conditions must have pushed its exchange-rate value ____ value of its designated band of variation.

above the upper

The foreign exchange market is best described as:

an electronically connected network of banks and their traders

The process of buying and selling any commodity, including a currency, to make a (nearly) riskless profit is called _____.

arbitrage

The difference between a country's domestic production of goods and services and its total expenditure on goods and services is equal to its ____ account.

current

The three broad categories that make up a country's balance of payments are the:

current account, the financial account, and the changes in official international reserves

Net Foreign Investment Formula

difference between national savings and domestic investment

____ is any flow of lending to or purchase of an ownership interest in a foreign entity that is controlled by the domestic entity that makes the loan or purchases the interest in the foreign entity.

direct investment

Current Account

includes all debit and credit items that are exports and imports of goods and services, income receipts and income payments, and gifts

What is recognized as important functions of the inter-bank part of the foreign exchange market?

it enables banks to take speculative positions on future exchange rate movements it supplies banks with continuous information about market conditions it enables banks to quickly readjust positions in the aftermath of dealing with a customer

If a country's official settlements balance is in surplus, then it is ____ its official reserve assets or foreign official reserve holdings of the country's assets are _____.

increasing decreasing

Overall Balance

indicates whether a country's balance of payments has achieved an overall pattern that is sustainable over time

A supply of foreign currency and a demand for US dollars can generally be expected to result when the US capital ____ occur.

inflows

The ____ is the statement that shows the amounts of a country's foreign assets and foreign liabilities at a point in time.

international investment position

The exchanges documented in the balance of payments have ____ implications for macroeconomic concerns such as growth, inflation, and unemployment.

major

The volume of foreign exchange trading per day is _____ the volume of stocks traded daily in the U.S.

many times greater than

The spot rice of foreign currency is ____-____, determined by the interaction of private ____ and ____ for that currency.

market-driven demand supply

Official Settlements Balance

measures the sum of the current account balance plus the nonofficial financial account balance measures the flows of all private transactions in goods, services, income, transfers, and nonofficial financial assets

The statistical discrepancy item is part of the balance of payments to indicate that some international flows are:

mismeasured

Official International Reserve Assets

money-like assets that are held by governments and that are recognized by governments as fully acceptable for payments between them

Suppose market conditions have pushed the exchange-rate value of a currency below the lower value of the band that the government has pledged to support. In this instance, intervention by the government in the form of ____ of its currency must occur.

purchases

The _____ market is the foreign exchange trading that is done by banks with their customers.

retail part of the

We refer to discrete official increases and decreases in the otherwise fixed par value of a currency as, respectively:

revaluations and devaluations

In a floating-rate system, if the demand curve for foreign currency shifts to the right, and the supply curve remains unchanged, then the exchange-rate value of the foreign currency _____.

rises

Suppose the dollar price of the British pound falls. This lower exchange rate (i.e., price) will increase the quantity demand for pounds as long as the quantity demanded of British goods ____ in response to the cheaper pound.

rises

The sum of the debit items in the balance of payments equals the:

sum of all credit items

If the balance of payments account of a country shows a current account deficit, it means that:

the country's foreign assets are growing slower than its foreign liabilities.

The three major broad categories of items that define the three major parts of a country's balance of payments:

the current account the financial account changes in official international reserves

The current account balance does NOT equal:

the difference between government saving and government investment

Net Foreign Investment

the increase in the country's foreign financial assets minus the increase in the country's foreign financial liabilities

Unilateral Transfers

the items that keep track of gifts that the country makes and gifts that it receives

Financial Account Balance

the net value of flows of financial assets and similar claims (excluding official international reserve asset flows)

Forward Exchange Rate

the price set now for an exchange that will take place sometime in the future

Goods and Services Balance

the sum of all of the exports and imports of goods and services (within the current account)

The goods and services balance is also called the ____ balance.

trade

A country's goods and services balance measures the country's net exports and is often called the country's:

trade balance

In the context of a country's balance of payments, unilateral transfers arise from:

transactions for which there are no offsetting transfers of value, such as gifts.