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
current account
an account within the balance of payments that summaries international trade in goods, services, and income payments
financial account
an account within the balance of payments that summaries international trade in financial assets, such as currencies, stocks, and bonds
capital account
an account within the balance of payments that summaries international trade in nonfinancial and non-produced assets such as patents and copyrights
credit
an account entry that records the value of a good, service, financial asset, or other asset that is exported from one country to another
debit
an account entry that records the value of a good, service, financial asset, or other asset that is imported from one country to another
account balance
difference between total credits and total debits
trade deficit
amount by which a country’s imports are greater than its exports; X (exports) - M (imports) < 0; current account deficit
trade surplus
amount by which a country’s exports are greater than its imports; X (exports) - M (imports) > 0; current account deficit
net exports
NX = X - M
