Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

EC250 > C.5 The Global Financial System and Exchange Rates > Flashcards

C.5 The Global Financial System and Exchange Rates Flashcards

1
Q

Open economy

A

An economy in which households, firms, and govt’s borrow, lend, and trade internationally

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Balance of payments

A

A record of a country’s trade with other countries in goods, services, and assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Current account

A

The part of the balance of payments that records a country’s net exports, net factor payments, and net transfers

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Financial account

A

The part of the balance of payments that records purchases of assets a country has made abroad and foreign purchases of assets in the country

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Net exports

A

Imports - exports

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Net factor payments

A

Investment and employment income received - paid

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Transfers

A

transfer payments by Canadian residents to international residents - transfer payments to Canadian residents from international residents

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

A current account surplus indicates that…

A

A country is consuming less than its current income, so it must be lending to the rest of the world or buying assets from the rest of the word

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Foreign direct investment

A

Investment into productions or firms by foreigners, either by setting up or expanding firms or by purchasing companies

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Foreign portfolio investment

A

The purchase of financial assets, such as stocks or bonds, by foreigners

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Financial account equation

A

Increase in foreign holdings of Canadian assets - Increase in Canadian holdings of foreign assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Statistical discrepancy

A

The amount that differs between the sum of the current and financial accounts

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Capital account

A

Records minor transactions like

1) migrants’ transfers
2) sales and purchases of non-produced, non-financial assets, which include copyright, patents, trademarks, or rights to natural resources

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Nominal exchange rate

A

The price of one country’s current in terms of another country’s currency

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Spot exchange rate

A

The current price of one country’s currency for another currency, for immediate exchange

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Current depreciation

A

A decrease in the market value of one country’s currency relative to another country’s currency, when the exchange rate is flexible

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Forward exchange rate

A

The exchange rate used to exchange currencies in the future

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Multilateral exchange rate

A

An index in which the value of the currency is measured against the average of the country’s main trading partners

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Real exchange rate

A

The rate at which the goods and services in one country can be exchanged for goods and services in another country

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Real exchange rate eq’n

A 
e = E*(P/P*)
where,
e = Real real exchange rate
E = Nominal exchange rate
P = Domestic price level
P* = Foreign price level
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Real means in terms of…

A

… goods and services

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Exchange rate system

A

An arrangement among countries about how exchange rates should be determined

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Fixed exchange rate system

A

A system in which exchange rates are set at levels determined and maintained by government or central bank

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Managed floating exchange rate system

A

A system in which private buyers and sellers in the foreign exchange market determine the value of currencies most of the time, with occasional central bank intervention

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Sources of demand for Canadian dollars
1. Foreign demand for Cad'n goods and services 2. Foreign demand for Cad'n physical assets 3. Foreign demand for Cad'n paper assets
26
How the nominal exchange rate affect the three sources of demand
1. Foreign demand for Cad'n goods and services depends negatively on real exchange rate 2. Foreign demand for Cad'n physical assets or claims on physical assets or claims on physical assets depends negatively on the real exchange rate 3. Foreign demand for Cad'n paper assets depends negatively on the nominal exchange rate
27
% return on foreign bonds eq'n
``` [(E^e_+1)(1 + i*) - E]/E where, E^e_+1 = expected nominal exchange rate one year from now E = nominal exchange rate i* = interest rate ```
28
Arbitrage
Taking advantage of price differences across markets by buying a product in one market and reselling int another markets at a higher price
29
What is the basic rule for the demand & supply curves of the Cad'n dollar
Anything that makes Cad'n goods, services, or assets more attractive relative to foreign ones shifts the demand curve to the right and the supply curve to the left
30
A lower nominal Cad'n exchange rate relative to another foreign price makes Cad'n products more...
Appealing
31
Interest rate spread
Difference between Cad'n and foreign interest rates
32
A higher Cad'n interest rate (or a lower foreign interest rate) makes Cad'n procuts more....
Appealing
33
A shift in demand for Cad'n goods and services with shift the demand curve ____ and the supply curve ____
1. right | 2. left
34
If the nominal exchange rate exceeds the equilibrium exchange rate E*, then there is _____ supply and the Cad'n dollar _____
1. excess | 2. depreciates
35
If traders expect the Cad'n interest rate to rise, this increases the _____ for the Cad'n dollar which causes an immediate ______ of the Cad'n dollar
1. demand | 2. appreciation
36
Currency revaluation
An increase in the market value of one country's currency relative to another country's currency when the exchange is fixed
37
Currency devaluation
A decrease in the market value of one country's currency relative to another country's currency when the exchange rate is fixed
38
How does the central bank control the exchange rate with a fixed exchange rate?
By buying and selling the country's currency on the foreign exchange market, using or acquiring foreign currency reserves
39
A pressure to appreciate in a fixed exchange rate means that there was excess ______ for the currency. The central bank will prevent appreciation by increasing the _____ which _______ the exchange rate
1. demand 2. supply 3. stabilizes
40
The down side of an increase in the amount of currency leads to higher _______ and higher ______
1. money supply | 2. inflation
41
Currency overvaluation
Overvaluation is a situation in which, at the current exchange rate, the real exchange rate is higher than one
42
If a currency is overvalued then the _____ ___ is higher than the currency they're fixed to
higher
43
Three reasons a currency might be devalued
1. Political instability 2. Overvaluation 3. Investor sentiment that the currency was likely to be devalued
44
Law of one price
The notion that identical products should sell for the same price everywhere, including in different countries, as long as they are freely tradeable
45
Advantage of fixed exchange rate system
Easier for businesses to plan and to borrow in other currencies
46
Disadvantages of fixed exchange rate system
Difficult to maintain | Eliminates possibility of depreciation during a recession
47
Advantages of floating exchange rate system
No need for gov't intervention | Allows exchange rate to reflect demand and supply in the market
48
Disadvantage of floating exchange rate system
Can make business planning difficult
49
Disadvantages of managed float exchange rate system
Central bank interventions are likely to be ineffective with a widely traded currency Interventions are effective against short-run pressures but not against fundamental trends
50
Advantage of managed float exchange rate system
Allows greater exchange rate stability than in a floating system
51
Purchasing Power Parity (PPP)
The theory that, in the long run, nominal exchange rates adjust to equalize the purchasing power of different currencies
52
PPP states that, in the long run, the nominal exchange rate should adjust to...
adjust to purchasing power of different currencies so the real interest rate equals 1
53
if PPP holds, the % change in the nominal exchange rate is equal to the difference between the ____ and _____ inflation rates
domestic and foreign
54
Three reasons PPP does not hold
1. not all goods and services are traded internationally 2. Countries impose barriers to trade like tariffs and quotas 3. Arbitrage is hampered by transportation costs
55
Interest parity condition
The proposition that differences in interest rates on similar bonds in different countries reflect investors' expectations of future changes in exchange rates
56
Interest parity condition equation
``` i = i* - (E^e_+1 - E)/E where, i = domestic interest rate i* = foreign interest rate E^e_+1 = the expected nominal interest rate one year from now ```
57
Differences in in interest rates on bonds depend on 1. 2.
1. investors typically see even similar bonds having important differences in liquidity and and default risk 2. the transaction costs of purchasing foreign financial assets are higher than for domestic assets
58
Saving = S = ?
S = S_Households + S_Gov't + S_Foreign
59
S_Households is (def'n and eq'n)
Def'n: Funds households have left from their incomes (including transfer payments received from the gov't) Eq'n: (Y + TR - T) - C
60
S_gov't is
Def'n: The difference between the gov't's tax receipts and its spending on goods and services and on transfer payments to households Eq'n: T - (G + TR)
61
S_foreign
Def'n: Saving from the foreign sector is (-1)*net exports | Eq'n: -NX
62
Basic national income eq'n
Y = C + I + G - NX where, Y = national income C = consumption expenditure I = investment expenditure on capital goods G = gov't purchases of goods and services NX = net exports
63
The supply of loanable funds is determined by
1. The willingness of households to save 2. The extend of gov't saving 3. the extent of foreign saving that is invested in Cad'n financial markets
64
The demand of loanable funds is determined by
The willingness of firms to borrow money to engage in new investment projects (e.g. new factories or carrying out reasearch or new houses)
65
A change in a variable that affects the willingness to demand or supply funds will ______ the curves
shift
66
When the gov't runs a budget deficit, the _____ of loanable funds ....
Supply | Shifts to the left
67
Crowding out
The reduction in private investment that results from an increase in gov't purchases
68
A small open economy's domestic real interest rate equals
the world interest rate
69
In a small open economy where L^s>L^d, the domestic desired ______ exceeds domestic desired ______
1. lending | 2. borrowing

EC250 (8 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions