Chapter 20

to fix exchange rates

each country may simply proclaim that its currency is worth so much in relation to that of other countries

deflationary (or restrictive) policies

help correct a balance-of-payments deficit by lowering domestic incomes and thus the demand for imports

the market demand for U.S. dollars

originates in Foreign demand for American exports (including tourism), Foreign demand for American investments, and Speculation

exports and imports

A change in the price of a country's money automatically alters the price of what?

Depreciation

A fall in the price of one currency relative to another

Appreciation

A rise in the price of one currency relative to another

balance of payments

A summary record of a country's international economic transactions in a given period of time

flexible exchange rates (often called floating exchange rates)

A system in which exchange rates are permitted to vary with market supply-and-demand conditions; floating exchange rates

managed exchange rate

A system in which governments intervene in foreign-exchange markets to limit but not eliminate exchange-rate fluctuations; "dirty floats."

foreign-exchange reserves

Holdings of foreign exchange by official government agencies, usually the central bank or treasury

foreign-exchange markets

Places where foreign currencies are bought and sold

market forces

Relative income changes, speculation, Relative price changes, Changes in product availability, and Relative interest rate changes

gold reserves

Stocks of gold held by a government to purchase foreign exchange

exchange rate

The price of one country's currency expressed in terms of another's; the domestic price of a foreign currency, example is euros to US dollars

a supply of US dollars

the demand for foreign currency represents what?

gold standard

An agreement by countries to fix the price of their currencies in terms of gold; a mechanism for fixing exchange rates

balance-of-payments surplus

An excess demand for domestic currency at current exchange rates

balance-of-payments deficit

An excess demand for foreign currency at current exchange rates

market shortage

The amount by which the quantity demanded exceeds the quantity supplied at a given price; excess demand

appreciate

Whenever one currency depreciates, another currency must do what?