Chapter 22: International Finance

Question 1

Balance of Payments

Answer 1

A periodic (usually annual) statement of the money value of all transactions between residents of one country and the residents of all other countries.

Question 2

Debit

Answer 2

In the balance of payments, any transaction that supplies the country’s currency in the foreign exchange market.

Question 3

Foreign Exchange Market

Answer 3

The market in which currencies of different countries are exchanged.

Question 4

Credit

Answer 4

In the balance of payments, any transaction that creates a demand for the country’s currency in the foreign exchange market.

Question 5

Current Account

Answer 5

The account in the balance of payments that includes all payments related to the purchase and sale of goods and services; components of the account include exports, imports and net unilateral transfers abroad.

Question 6

Merchandise Trade Balance

Answer 6

The difference between the value of merchandise exports and the value of merchandise imports.

Question 7

Merchandise Trade Deficit

Answer 7

When the value of merchandise exports is less than the value of merchandise imports.

Question 8

Merchandise Trade Surplus

Answer 8

When the value of merchandise exports is greater than the value of merchandise imports.

Question 9

Current Account Balance

Answer 9

In the balance of payments, the summary statistic for exports of goods and services, imports of goods and services

Question 10

Capital Account

Answer 10

The account in the balance of payments that includes all payments related to the purchase and sale of assets and to borrowing and lending activities. Components include outflow of Domestic capital and inflow of foreign capital.

Question 11

Capital Account Balance

Answer 11

The summary statistic for the outflow of domestic capital, equal to the difference between the outflow of domestic capital and the inflow of foreign capital.

Question 12

International Monetary Fund (MF)

Answer 12

An international organization created to oversee the international monetary system. The IMF does not control the world’s money supply but it does hold currency reserves for member nations and make loans to central banks.

Question 13

Special Drawing Right (SDR)

Answer 13

An international money, created by the IMF, in the form of bookkeeping entries; like gold and currencies, it can be used by nations to settle international accounts.

Question 14

Exchange Rate

Answer 14

The price of one currency in terms of another currency.

Question 15

Flexible Exchange Rate System

Answer 15

The system whereby exchange rates are determined by the forces of supply and demand for a currency.

Question 16

Appreciation

Answer 16

An increase in the value of one currency relative to other currencies

Question 17

Depreciation

Answer 17

A decrease in the value of one currency relative to other currencies.

Question 18

Purchasing Power Parity (PPP) Theory

Answer 18

Theory stating that exchange rates between any two currencies will adjust to reflect changes in the relative price levels of the two countries.

Question 19

Fixed Exchange Rate System

Answer 19

The system whereby a nation’s currency is set at a fixed rate relative to all other currencies, and central banks intervene in the foreign exchange market to maintain the fixed rate.

Question 20

Overvalued

Answer 20

A currency is overvalued if its price in terms of other currencies is above the equilibrium price.

Question 21

Undervalued

Answer 21

A currency is undervalued if its price in terms of other currencies is below the equilibrium price.

Question 22

Devaluation

Answer 22

A government action that changes the exchange rate by lowering the official price of a currency.

Question 23

Revaluation

Answer 23

A government act that changes the exchange rate by raising the official price of a currency.

Question 24

Optimal Currency Area

Answer 24

A geographic area in which exchange rates can be fixed or a common currency used without sacrificing domestic economic goals, such as low unemployment.

Question 25

Managed Float

Answer 25

A managed flexible exchange rate system, under which nations now and then intervene to adjust their official reserve holdings to moderate major swings in exchange rates.