ch 4

Question 1

arbitrage

Answer 1

buying goods in a lower priced market and selling them in a higher priced market to make profits

Question 2

Balance of Payments

Answer 2

a statement of account that shows all transactions between the residents of one country and the rest of the world for a given period of time

Question 3

balance of transfers

Answer 3

the net of transfer payments going overseas and inflows from abroad

Question 4

bid-ask spread

Answer 4

the difference between bid and ask prices of a currency; the transaction fee earned by the bank

Question 5

big mac index

Answer 5

calculation using the cost of a McDonald’s restaurant sandwich to assess the relative values of currencies

Question 6

Bretton Woods Agreement

Answer 6

the 1944 decision to establish a global currency system with the U.S. dollar pegged at a fixed rate of exchange to gold, and the currencies of 43 other countries fixed to the dollar

Question 7

clean float currency

Answer 7

monetary system with minimal government intervention; largely market determined

Question 8

covered interest rate parity

Answer 8

principle implying that forward exchange rates and spot exchange rates set interest rates on bonds in different countries equal to one another

Question 9

current account

Answer 9

the activities of consumers and businesses in the economy with respect to the trade balance, services balance, income balance, and net transfers

Question 10

direct quotes

Answer 10

prices of a foreign currency in dollars, or the number of dollars per one unit of foreign currency

Question 11

dirty float currency

Answer 11

monetary system with varying degrees of government intervention to maintain a range of acceptable values against other currencies

Question 12

discount

Answer 12

in the forward market, the selling of a currency at a spot rate that is less than the forward rate

Question 13

dollarization

Answer 13

the practice of using the dollar or some other foreign currency together with, or instead of, a domestic currency in a country

Question 14

exchange rate

Answer 14

the price at which one currency can be converted to another currency

Question 15

financial account

Answer 15

consists of domestic-country owned assets abroad, foreign owned assets in the domestic country, and net financial derivatives

Question 16

fixed exchange rate system

Answer 16

system in which the country pegs its currency at a fixed rate to a major currency or basket of currencies, while the exchange rate fluctuates within a narrow margin around a central rate

Question 17

foreign direct investment (FDI)

Answer 17

encompasses purchases of fixed assets (such as factories and equipment) abroad used in the manufacture and sales of goods and services

Question 18

foreign exchange markets

Answer 18

a global network of international banks and currency traders that trade different countries’ currencies

Question 19

forward market

Answer 19

exchange that enables purchases and sales of currencies in the future with prices (or the forward rate) established at a previous time