CH19 - Exchange Rates and Balance of Payments Flashcards
What is the Balance of Payments?
A summary record of a country’s transactions with the rest of the world.
It includes the buying and selling of goods, services, and assets.
The sale of a product/asset to foreigners are recorded as a _______ item
credit
The purchase of a product/asset from foreigners are recorded as a _____ item
debit
What does the current account record?
Transactions arising from trade in goods/services, and net investment income earned from foreign asset holdings.
What are the 2 sections of the current account?
- Trade account
- Capital-service account
What does the trade account record?
The value of exports and imports of goods and services
What does the capital-service account record?
The payments and receipts that represent income earned on assets (interest and dividends)
What does the capital account record?
Payments and receipts arising from the purchase and sale of assets
When Canadians purchase foreign assets, financial capital is _______ Canada and going _______. It is called a __________ ?
leaving
abroad
capital outflow
What is the BOP equation?
BOP = CA + KA = 0
What is an IOU in french?
Reconnaissance de dette
(I owe you)
Any surplus in the current account must be matched by ____________ ?
An equal deficit in the capital account.
The balance of payments is always _____?
zero
What is the exchange rate?
The number of units of domestic currency required to purchase one unit of foreign currency
What is an appreciation of the Canadian dollar?
It means a fall in the exchange rate
It takes less units of CAD to purchase one unit of foreign currency
What is a depreciation of the Canadian dollar?
It means a rise in the exchange rate
It takes more units of CAD to purchase one unit of foreign currency
The supply of foreign exchange is the sum of the
supplies for which 3 purposes?
- Canadian Exports
- Canadian Asset Sales: Capital Inflows
- Reserve Currency
what is a flexible exchange rate?
An exchange rate that is left free to be determined by the forces of demand and supply on the free market, with no intervention by the central banks
What is a fixed exchange rate?
An exchange rate that is maintained within a small range around its publicly stated par value by the intervention in the foreign-exchange market by a country’s central bank
What type of system do we have when we assume that there is no intervention in the foreign-exchange market by central banks?
Flexible
In a flexible exchange rate, what happens when supply is greater than demand?
The exchange rate will fall
How can the central bank prevent the downward adjustment after an excess of supply?
By purchasing the excess supply
A rise in the world price of Canadian exports
causes the Canadian dollar to ___________
appreciate
Other things being equal, if Canada has higher
inflation than other countries, the Canadian dollar
will be ________ relative to other currencies.
depreciating
If Canada has lower inflation than other countries,
the Canadian dollar will be ______________
appreciating
A contractionary monetary policy in Canada will lead
to a rise in Canadian ___________, a capital_______,
and an _________ of the dollar.
interest rates
inflow
appreciation
What are the 3 policy issues?
- Current account deficit/surplus
- “Correct” value for the CAD
- Should Canada have a fixed exchange rate?
What is the current account equation?
CA = S + (T - G) - I
What are the 3 reasons for an increase in the current account deficit?
- Increase in private investment
- Decrease in private savings
- Increase in gov.’s budget deficit
What is the purchasing power parity?
The theory that, over the long term, the exchange rate between two currencies adjusts to reflect relative price levels.
What is the PPP exchange ratio?
e = Price dom / Price foreign
What are 2 reasons why the price of two baskets are not the same in two countries?
- Different countries produce different goods
- Non-traded goods are important
