Chapter 16

Question 1

anchor currency

Answer 1

The currency to which a country
fixes its exchange rate.

Question 2

balance of payments

Answer 2

A bookkeeping system for
recording all payments that have a direct bearing on the movement of funds between a country
and all other countries

Question 3

balance of payment crisis

Answer 3

A foreign exchange crisis
stemming from problems in a country’s balance
of payments.

Question 4

bretton woods system

Answer 4

The international monetary
system in use from 1945 to 1971 in which
exchange rates were fixed and the U.S. dollar
was freely convertible into gold (by foreign governments and central banks only).

Question 5

capital controls

Answer 5

Restrictions on the free movement
of capital across the borders

Question 6

currency board

Answer 6

: A monetary regime in which the
domestic currency is backed 100% by a foreign
currency (say, dollars) and in which the noteissuing authority, whether the central bank or
the government, establishes a fixed exchange
rate to this foreign currency and stands ready
to exchange domestic currency at this rate
whenever the public requests it.

Question 7

currency union

Answer 7

A situation in which a group of countries decide to adopt a common currency. (Also
called a monetary union.)

Question 8

current account

Answer 8

An account that shows international
transactions involving currently produced goods
and services.

Question 9

net exports

Question 10

policy trilemma

Answer 10

A country cannot pursue the
following three policies at the same time:
(1) free capital mobility; (2) a fixed exchange
rate; and (3) independent monetary policy.
(Also called impossible trinity.)

Question 11

reserve currency

Answer 11

A currency such as the U.S. dollar
that is used by other countries to denominate the
assets they hold as international reserves.

Question 12

revaluation

Answer 12

: Resetting of the par value of a currency
at a higher level.

Question 13

devaluation

Answer 13

: Resetting of the par value of a currency
at a lower level

Question 14

dollarization

Answer 14

A monetary strategy in which a country
abandons its currency altogether and adopts that
of another country, typically the U.S. dollar.

Question 15

emergin market countries

Question 16

fixed exchange rate regime

Question 17

floating exchange rate regime

Question 18

foreign exchange interventions

Question 19

impossible trinity

Answer 19

A country cannot pursue the
following three policies at the same time:
(1) free capital mobility; (2) a fixed exchange
rate; and (3) independent monetary policy.
(Also called impossible trinity.)

Question 20

IMF

Answer 20

The international
organization created by the Bretton Woods agreement whose objective is to promote the growth of
world trade by making loans to countries experiencing balance-of-payments difficulties.

Question 21

international reserves

Answer 21

Central bank holdings of assets
denominated in foreign currencies

Question 22

managed float regime (dirty float)

Answer 22

The current international
financial environment in which exchange rates
fluctuate from day to day, but central banks
attempt to influence their countries’ exchange
rates by buying and selling currencies.

Question 23

merchandise trade balance

Question 24

monetary union

Answer 24

A situation in which a group of countries decide to adopt a common currency. (Also
called a currency union.)

Question 25

speculative attack

Answer 25

A situation in which speculators
engage in massive sales of a currency

Question 26

sterilized foreign exchange intervention

Answer 26

A foreign
exchange intervention with an offsetting open
market operation that leaves the monetary base
unchanged.

Question 27

trade balance

Answer 27

The difference between merchandise
exports and imports.

Question 28

unsterilized foreign exchange intervention

Answer 28

A foreign
exchange intervention in which a central bank
allows the purchase or sale of domestic currency
to affect the monetary base.

Question 29

world bank