Chapter 11: International Finance Flashcards
exchange rate
the rate or price at which one currency can be exchanged for another
foreign exchange market
a market in which people exchange one currency for another currency
domestic currency
currency or money used in the domestic country
foreign currency
currency or money used in foreign countries
flexible exchange rate
an exchange rate that changes as demand and supply for the currency change
currency conversion from A to B
e = B$ / A$
appreciation of currency
an increase in value or price of one currency relative to another
depreciation of currency
a decrease in value or price of one currency relative to another
equilibrium exchange rate
an exchange rate that is determined by the interaction of the demand for and supply of the currency
2 factors that affect both supply and demand in a foreign currency market?
prices and interest rates, both domestic and foreign
fixed exchange rate
an exchange rate that is set at a specific value and maintained over time
foreign reserves
government holdings of foreign currencies; generally used to settle international transactions and conduct exchange rate policy
expansion monetary policy (easy money)
the actions taken by a country’s central bank to expand the money supply and lower interest rates with the objective of increasing real GDP and reducing unemployment
contractionary monetary policy (tight money)
the actions taken by a country’s central bank to contract the money supply and raise interest rates with the objective of decreasing real GDP and controlling inflation
balance of payments
collection of national income accounts that summarize the flow of international trade between one country and all other countries
current account + financial account + capital account = 0
