Book Notes Flashcards
What are eurocurrencies
Are domestic currencies of one country on deposit in a second country
Why hold eurocurrencies?
- holding excess corporate liquidity
2. short-term bank loans to finance corporate working capital
Explain Theory of comparative advantage
Economies ability to produce a particular good or service at a lower opportunity cost than its competitors
Assumptions of Theory of comparative advantage
- Free trade
- Perfect competition
- No uncertainty
Explain direct foreign exchange rate risk
Risk in accepting and paying in foreign currencies
Explain direct investment
Investment that has a long-term life or maturity and where the investor has an explicit amount of control
Explain portfolio investment
Investment that has short-term maturity where the investors doesn’t have control
Explain The Official Reserve Account
Total reserves held by official monetary authorities within a country
Parity rate
Fixed exchange rate between two currencies
How should a country with a fixed exchange rate fixed BOP imbalances
Responsibility of the government by buying or selling domestic currency
How should a country with a floating exchange rate fix BOP imbalances
Supply and demand will make BOP = 0 because of the exchange rate difference
How should a country with a managed exchange rate fix BOP imbalances
The government should intervene with changing the interest rates
Explain the transmission mechanism
Change in exchange rate -> Chang in relative price of imports / exports -> demand changes of products
J-curve effect
The process of intentionally devaluing the currency. The currency pair will be restored because of the inelastic reaction of volume of imports and exports. The inelastic reaction is created due to the increased competitiveness.
Explain capital control
Any restrictions that limits or alters the rate or direction of capital movements into or out of a country
