Book 1_Econ_CAPITAL FLOWS AND THE FX MARKET

Question 1

sell side

Answer 1

large multinational banks

Question 2

buy side

Answer 2

Corporations
Investment accounts
Governments and government entities,
Retail FX market

Question 3

nominal exchange rate

Answer 3

The exchange rate at a point in time

Question 4

real exchange rate

Answer 4

the purchasing power of one currency in terms of the amount of goods priced in another currency, relative to an earlier (base) period.

Question 5

real exchange rate formula

Answer 5

real P/B ex rate = nominal P/B ex rate x (CPI base/CPI price)

Question 6

USD/EUR decrease 1.44 to 1.42

Answer 6

EUR decrease by 0.02/1.44
USD increase by (1/1.42)/(1/1.44)

Question 7

A nominal exchange rate of 1.44 USD/EUR

Answer 7

$1.44 per euro.

Question 8

An increase (decrease) in an exchange rate

Answer 8

an appreciation (depreciation) of the base currency relative to the price currency

Question 9

hedgers

Answer 9

they enter into transactions that decrease an existing foreign exchange risk

Question 10

speculators

Answer 10

they enter into transactions that increase their foreign exchange risk

Question 11

formal dollarization

Answer 11

a country uses the currency of another country.

Question 12

monetary union

Answer 12

several countries use a common currency

Question 13

currency board arrangement

Answer 13

an explicit commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate

Question 14

conventional fixed peg arrangement

Answer 14

a country pegs its currency within margins of ±1% versus another currency

Question 15

pegged exchange rates within horizontal bands or a target zone

Answer 15

the permitted fluctuations in currency value relative to another currency or basket of currencies are wider (e.g., ±2%)

Question 16

crawling peg

Answer 16

The exchange rate is adjusted periodically, typically to adjust for higher inflation versus the currency used in the peg.

Question 17

management of exchange rates within crawling bands

Answer 17

the width of the bands that identify permissible exchange rates is increased over time.

Question 18

managed floating exchange rates

Answer 18

the monetary authority attempts to influence the exchange rate in response to specific indicators, such as the balance of payments, inflation rates, or employment, without any specific target exchange rate.

Question 19

independently floating

Answer 19

the exchange rate is market determined

Question 20

objectives of capital flow restrictions

Answer 20

• Reducing the volatility of domestic asset prices
• Maintaining fixed exchange rates
• Keeping domestic interest rates low and enabling greater independence regarding monetary policy
• Protecting strategic industries from foreign ownership