CH19 - Exchange Rates and Balance of Payments

Question 1

What is the Balance of Payments?

Answer 1

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.

Question 2

The sale of a product/asset to foreigners are recorded as a _______ item

Answer 2

credit

Question 3

The purchase of a product/asset from foreigners are recorded as a _____ item

Answer 3

debit

Question 4

What does the current account record?

Answer 4

Transactions arising from trade in goods/services, and net investment income earned from foreign asset holdings.

Question 5

What are the 2 sections of the current account?

Answer 5

1. Trade account
2. Capital-service account

Question 6

What does the trade account record?

Answer 6

The value of exports and imports of goods and services

Question 7

What does the capital-service account record?

Answer 7

The payments and receipts that represent income earned on assets (interest and dividends)

Question 8

What does the capital account record?

Answer 8

Payments and receipts arising from the purchase and sale of assets

Question 9

When Canadians purchase foreign assets, financial capital is _______ Canada and going _______. It is called a __________ ?

Answer 9

leaving
abroad
capital outflow

Question 10

What is the BOP equation?

Answer 10

BOP = CA + KA = 0

Question 11

What is an IOU in french?

Answer 11

Reconnaissance de dette
(I owe you)

Question 12

Any surplus in the current account must be matched by ____________ ?

Answer 12

An equal deficit in the capital account.

Question 13

The balance of payments is always _____?

Answer 13

zero

Question 14

What is the exchange rate?

Answer 14

The number of units of domestic currency required to purchase one unit of foreign currency

Question 15

What is an appreciation of the Canadian dollar?

Answer 15

It means a fall in the exchange rate
It takes less units of CAD to purchase one unit of foreign currency

Question 16

What is a depreciation of the Canadian dollar?

Answer 16

It means a rise in the exchange rate
It takes more units of CAD to purchase one unit of foreign currency

Question 17

The supply of foreign exchange is the sum of the
supplies for which 3 purposes?

Answer 17

1. Canadian Exports
2. Canadian Asset Sales: Capital Inflows
3. Reserve Currency

Question 18

what is a flexible exchange rate?

Answer 18

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

Question 19

What is a fixed exchange rate?

Answer 19

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

Question 20

What type of system do we have when we assume that there is no intervention in the foreign-exchange market by central banks?

Answer 20

Flexible

Question 21

In a flexible exchange rate, what happens when supply is greater than demand?

Answer 21

The exchange rate will fall

Question 22

How can the central bank prevent the downward adjustment after an excess of supply?

Answer 22

By purchasing the excess supply

Question 23

A rise in the world price of Canadian exports
causes the Canadian dollar to ___________

Answer 23

appreciate

Question 24

Other things being equal, if Canada has higher
inflation than other countries, the Canadian dollar
will be ________ relative to other currencies.

Answer 24

depreciating

Question 25

If Canada has lower inflation than other countries,
the Canadian dollar will be ______________

Answer 25

appreciating

Question 26

A contractionary monetary policy in Canada will lead
to a rise in Canadian ___________, a capital_______,
and an _________ of the dollar.

Answer 26

interest rates
inflow
appreciation

Question 27

What are the 3 policy issues?

Answer 27

1. Current account deficit/surplus
2. “Correct” value for the CAD
3. Should Canada have a fixed exchange rate?

Question 28

What is the current account equation?

Answer 28

CA = S + (T - G) - I

Question 29

What are the 3 reasons for an increase in the current account deficit?

Answer 29

1. Increase in private investment
2. Decrease in private savings
3. Increase in gov.’s budget deficit

Question 30

What is the purchasing power parity?

Answer 30

The theory that, over the long term, the exchange rate between two currencies adjusts to reflect relative price levels.

Question 31

What is the PPP exchange ratio?

Answer 31

e = Price dom / Price foreign

Question 32

What are 2 reasons why the price of two baskets are not the same in two countries?

Answer 32

1. Different countries produce different goods
2. Non-traded goods are important