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International Business > Chapter 8: The International Monetary System and Financial Forces > Flashcards

Chapter 8: The International Monetary System and Financial Forces Flashcards

1
Q

A monetary system that defines the value of a currency in terms of a fixed amount of gold.

A

The Gold Standard

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2
Q

Gold often serves as a way to store value during _______.

A

crises

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3
Q

Where was the Gold Standard established, and who established it?

A

Established in Britain in 1717 by Sir Isaac Newton

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4
Q

With the Gold Standard, the government (does/does not) have monetary flexibility.

A

DOES NOT.
(if you have monetary flexibility, governments can increase or decrease the money supply. If they spend a lot and increase the money supply, the end result will be inflation (like what we’re experiencing now in the US))

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5
Q

T or F: Gold has traditionally been used as a medium of exchange. People value and trust gold. Therefore, people willingly accept gold.

A

True

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6
Q

Why do we value the US dollar (just a piece of paper)? What would make the U.S. dollar lose value to people?

A
  • We can use it to buy goods and services.
  • If people lose trust in the system (it’s a function of how much trust people have in the system. If people lose faith in the US dollar, then it won’t be worth very much.)
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7
Q

What took place after the end of World War II, and created a system of fixed exchange rates?

A

The Bretton Woods System/Agreement

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8
Q

The Bretton Wood System was the international monetary system in place from 1945 to 1971, with par value based on _______ and the _____ _______.

A

gold; U.S. dollar

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9
Q

currency’s value is tied to the value of another currency or gold.

A

fixed exchange rates

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10
Q

assets held by a nation’s central bank, used to back up government liabilities.

A

reserves
(ex: US, Canadian and French governments all have a certain amount of reserves. It’s not uncommon for the U.S. dollar to hold in their reserve currencies from other countries. (ex: Euros, gold, Japanese Yen)

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11
Q

national currency that is also a reserve currency will eventually run a deficit, leading to lack of confidence in the reserve currency and a financial crisis. This is known as the _______ ________.

A

Triffin Paradox

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12
Q

the unit of account for the IMF and other international organizations.

A

Special Drawing Rights (SDR)

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13
Q

What is the most used central reserve since the end of World War II?

A

The U.S. Dollar

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14
Q

T or F: The euro is the most widely used currency in the world. Most international transactions are done using the euro.

A

False; the U.S. dollar for both statements.
(Some countries not happy with this because they think it gives the U.S. a lot of influence (ex: the Chinese).

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15
Q

Holding large amounts of U.S. dollars eventually means they will lose ______ (triffin paradox).

A

value

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16
Q

T or F: The IMF would like a non-national asset to become the main reserve.

A

True

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17
Q

________ _______ _____ are determined by supply and demand that allow currency values to float against one another.

A

Floating exchange rates

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18
Q

What determines how strong or weak one currency is against the other (ex: dollar vs. euro?)

A

Supply and demand.
(If there’s a need for more euros, the price/value of the euro is likely to appreciate (increase) because of an increase in demand. If the U.S. government prints a lot of dollars, spends a lot and decreases the money supply, the end result will be a depreciation/weakening of the U.S. dollar.)

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19
Q

The _________ ________ established flexible exchange rates among IMF members.

A

Jamaica Agreement

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20
Q

One of the Current Currency Arrangements:
one country adopts the currency of another, or a group of countries adopt a common currency.

A

Currency exchange arrangement with no separate legal tender

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21
Q

One of the Current Currency Arrangements:
commits the country’s government to holding foreign reserves of a specific currency in an amount equal to its domestic currency supply and exchange the two at a fixed rate.

A

Currency board arrangement

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22
Q

One of the Current Currency Arrangements:
the time of one currency to another; allows a currency’s exchange rates with one or a basket of currencies to fluctuate around a fixed rate within a narrow band of less than 1 percent (a little fluctuation of less than 1 percent is allowed).

A

Conventional fixed-peg/fixed-rate arrangement

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23
Q

Saudi Arabia, Jordan, Oman, Turkmenistan, the United Arab Emirates, and the Bahamas are among the countries pegged to the _____ ______. (fluctuation of less than 1 percent to the _____ _____ is allowed)

A

U.S. dollar; U.S. dollar

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24
Q

One of the Current Currency Arrangements:
pegged exchange rate within a horizontal band: In a different peg arrangement, exchange rate fluctuations greater than 1 percent are allowed.

A

Stabilized arrangement
(Some countries have their currency pegged to the U.S. dollar, others have it to the euro. Why these currencies? → because these are all considered to be strong currencies. They don’t lose a lot of their value.)

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25
Q

T or F: If you are a small, poor country, you want to tie your currency to a strong currency to give the local currency some credibility.

A

True

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26
Q

One of the Current Currency Arrangements:
a currency is readjusted periodically at a fixed, pre-announced rate or in response to changes in indicators. (ex: Nicaragua has this arrangement with the U.S. dollar)

A

Crawling peg

(ex: China has been relaxing its dollar peg since 2005, managing its currency against a basket of trading currencies.)

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27
Q

One of the Current Currency Arrangements:
readjusts the country’s currency to maintain fluctuation margins around a central rate.

A

Crawling band

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28
Q

In 2013, only Tonga listed this arrangement, linked to a basket of currencies, but in times of crisis, it may be found useful. This arrangement is known as a snake in the tunnel in the London foreign exchange markets.
Which current currency arrangement is this describing?

A

Crawling band

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29
Q

One of the Current Currency Arrangements:
the currency fluctuates, while the country’s monetary authority actively intervenes on the exchange market without specifying or making public its goals and targets. (currency is allowed to fluctuate up or down within a certain band/range)

A

Managed floating

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30
Q

One of the Current Currency Arrangements:
rely on the market. Governments may intervene, but to moderate the rate of change rather than to establish the currency’s level. (no limits, no bands whatsoever)

A

Free floating exchange rates

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31
Q

Canada, the UK, the US, Sweden, Japan, and the EU Countries follow which current currency arrangement?

A

Free floating exchange rates

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32
Q

Can local governments slow down the weakening of a currency, and if so, how?

A
  • Yes and no. They can do things short-term (temporarily) to slow it down, but if that’s the trend, it’s because the economic conditions are really bad and there’s not much you can do about it.
  • How? –> they would take some of the currency that the bank has in reserve, and sell them, and buy local currency (ex: Lebanese government would sell U.S. dollars (their reserve currency) and purchase Lebanese pounds). What happens? Well, it’s a reduction in supply, which causes the value to go up.
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33
Q

What is one of the limitations on both the Gold Standard and the Bretton Woods System?

A

The limitation on expansion–you can’t grow as fast as you want to, but you get stability.
(With floating, you can grow a lot more, but you’re putting the trust in the currency at risk, unless the country is very strong)

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34
Q

Fill in the blanks in regards to the pros, cons, and controlling mechanism for the Gold Standard monetary system:
1. Pros:
- _________
- Widely _______
- _________ monetary discipline
2. Cons:
- Impractical with ______ ______ ______.
- _______ to hold.
3. Controlling Mechanism:
- Gold flows; ______-______-______ mechanism (Hume)

A
  1. Pros:
    - Simple
    - trusted
    - Mandated
  2. Cons:
    - large trade flows
    - costly
  3. Controlling Mechanism:
    - price-specie-flow
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35
Q

Fill in the blanks in regards to the pros, cons, and controlling mechanism for the Bretton Woods Fixed Gold Exchange monetary system:
1. Pros:
- ______ rate
- Good for ______ ______
2. Cons:
- Led to U.S. balance of ______ _______
- Led to U.S. government ________ to foreign central banks.
- Reduced U.S. _______ reserves.
3. Controlling Mechanism:
- Government ________ rates against dollar.
- Dollar _______ against gold.

A
  1. Pros:
    - fixed
    - trade growth
  2. Cons:
    - payment deficit
    - liabilities
    - gold
  3. Controlling Mechanism:
    - adjusted
    - constant
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36
Q

Fill in the blanks in regards to the pros, cons, and controlling mechanism for the Floating monetary system:
1. Pros:
- ________ (free/managed float, peg)
- Responsive to _____ _______
- Good for ______ ______.
2. Cons:
- Causes ______ ________ currency values.
3. Controlling Mechanism:
- ______ ______ with some government intervention.

A
  1. Pros:
    - flexible
    - market forces
    - huge volume
  2. Cons:
    - widely swinging
  3. Controlling Mechanism:
    - Market forces
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37
Q

What is the institution for central bankers called? (not for individuals, so like the Federal Reserve of the U.S., The European Central Bank, etc. who deal with this together)

A

The Bank for International Settlements (BIS)

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38
Q

The Bank for International Settlements (BIS) operates to build _______ in order to foster monetary and financial stability.

A

cooperation

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39
Q

T or F: The Bank for International Settlements is known as the most discrete financial institution in the world.

A

True

40
Q

Difference between monetary and fiscal:
- Monetary policy has to do with _____ ______.
- Fiscal policy is ________.

A
  • money supply (how much money is available in the market)
  • taxation

(Governments have these 2 tools to control the economy.)

41
Q

What are the 4 major currencies that are allowed by their central banks to fluctuate freely against each other (are fluctuating currency values)?

  • The variable that determines these things are ________ ________.
A
  1. U.S. dollar
  2. British pound sterling
  3. Japanese yen
  4. Euro
  • market conditions (Supply, demand, GDP, growth, employment, imports, exports, etc.)
42
Q

T or F: The Russian Ruble is a very strong currency and is worth very much outside Russia.

A

False; is not a strong currency and is not worth very much outside Russia

43
Q

Why Foreign Currency Exchange Occurs:
Buyers and sellers want to do business in their own currency to ______ _______ that accompanies currency exchange.
- ______ _______ used as a vehicle for international trade or investment, such as the diamond market uses U.S. dollar.
- _________ _______ used to intervene in the foreign currency exchange markets.

A
  • avoid risk (When we sell our dollars (to convert them into another currency for trade), we are increasing the supply of dollars in the market, which in turn creates inflation.)
  • vehicle currency
  • intervention currency
44
Q

When looking at exchange rates, there are different terms that are used. What are two terms we went over in class?

A
  1. Spot rate
  2. Forward rate
45
Q

_________ currency is quoted as dollars per unit of currency instead of in units of currency per dollar.

A

reciprocal

46
Q

the exchange rate between two currencies for delivery within two business days.

A

spot rate (the immediate rate; ex: let’s say i’m flying to Paris next week. I go to my local bank, and I want to exchange 2,000 dollars in euros. that will be based on the spot rate)

47
Q

exchange rate between two currencies for delivery in the future, usually 30, 60, 90, or 180 days.

A

forward rate

48
Q

contracts that are entered today but will take place 30,60, or 90 days from today; an agreement that takes place today where we agree on the rate today, but that will not take place until 30,60, or 90 days from today.

A

forward contracts
(ex: let’s assume I want to buy some French wine and I don’t have to pay the French until 60 days from today. What are my options? → I can wait 60 days and then exchange my dollars for euros and pay the French, but I’m taking a risk → if the dollar depreciates/weakens during those 60 days, it will cost a lot more. (If the dollar appreciates, it’s a good deal). So, if you don’t want to take on this risk, you can enter into a forward contract, which is an agreement that takes place today where we agree on the rate today, but that will not take place until 60 days from today.)

49
Q

You’ll be able to get a contract on most currencies, but not all. You won’t be able to get a contract on ______ currencies.

A

risky (think about the forward contract thing we were talking about; can’t get this with risky currencies)

50
Q

highest-priced BUY order currently in the market.

A

bid price

51
Q

lowest-priced SELL order currently in the market.

A

ask price

52
Q

T or F: You always do these things (bid and ask) from the perspective of the domestic currency dealer. The domestic currency dealer buys and sells currency.

A

False; FOREIGN currency dealer for both statements

53
Q

The Rule of Business is to buy (high/low), sell (high/low)

A

low; high

(the foreign currency dealer will buy your currency low, and sell high)

54
Q

What is the difference between buy and sell (known as the spread)?

A

The profit

55
Q

What are the 2 things that cause the fluctuations in exchange rates?

A
  1. Monetary policies
  2. Fiscal policies
56
Q
  • (Fiscal/monetary) policies control the amount of money in circulation and its growth rate.
  • (Fiscal/monetary) policies address the collecting and spending of money by the government. (how much revenue the government gets from taxation)
A
  • Monetary
  • Fiscal
57
Q

What concept says that in an efficient market, like products will have like prices.

A

Law of one price concept

58
Q

the process of buying and selling instantaneously (simultaneously) to make profit with no risk.

A

Arbitrage

(Buying and selling is not free. There are fees, costs, and commissions. Sometimes, the profit that you make when you compare this to those fees that you have to pay, in some cases, are about equal.)

59
Q

________ _______ shows the relationship between real and nominal interest rates.

A

Fisher effect

60
Q

How do you calculate the real interest rate?

A

Nominal interest rate - the expected rate of inflation

61
Q

T or F: The International Fisher Effect says the interest rate differentials for any two currencies will reflect the expected change in their exchange rates.

A

True

62
Q

the amount of adjustment that must be made in the exchange rates for two currencies for them to have equivalent purchasing power.

A

purchasing power parity

63
Q

Forecasting exchange rates is very (easy/difficult). You can’t predict what the currency will be in the future, but you can predict _______.

A
  • difficult
  • trends
64
Q

the assumption that current market prices fully reflect all available relevant information.

A

Efficient market approach (for exchange rate forecasting)

65
Q

the assumption that the unpredictability of factors suggests that the best predictor of tomorrow’s prices is today’s prices.

A

Random walk hypothesis (for exchange rate forecasting)

66
Q

based on econometric models that attempt to capture the variables and their correct relationships.

A

fundamental approach (for exchange rate forecasting)

67
Q

analyzes data for trends and then projects these trends forward.

A

technical analysis (for exchange rate forecasting)

68
Q

T or F: Governments can control currency exchange of their currency and other currencies within their borders. (some countries control their currency)

A

True (the motivation of this is to manage foreign reserves!!!)

69
Q

With currency controls, exchange rates are usually (above/below) open market rates.

A

above

70
Q

________ currencies (currencies that are easily traded) can be exchanged for other currencies without restrictions.

A

convertible

71
Q

Nonconvertible currencies’ value is arbitrarily fixed typically at a rate (higher/lower) than its value in the free market and the government imposes ______ _______.

A
  • higher
  • exchange controls
72
Q

Effective tax management can yield a _______ _________.

A

competitive advantage

73
Q

What are the 3 types of taxation?

A
  1. Income tax
  2. Value-added tax (VAT)
  3. Witholding tax
74
Q

a sustained increase in prices

A

inflation

75
Q

Inflation determines real cost of _______ in capital markets.

A

borrowing

76
Q

Rising interest rates (encourage/discourage) borrowing.

A

encourage

77
Q

Answer the following T or F questions:
1. T or F: Inflated currencies tend to strengthen.
2. Interest rates rise with inflation.
3. Inflation rates cause the cost of the goods and services to rise, so they become more competitive globally.

A
  1. False; tend to WEAKEN
  2. True
  3. False; they become LESS competitive globally
78
Q

What does this describe:
A record of a country’s transactions with the rest of the world.
Shows flow of capital in and out of the country.
Reveals demand for a country’s currency.

A

Balance of Payments (BOP)

79
Q

Balance of Payments accounts use ______-_________ bookkeeping.

A

double-entry

80
Q
  • Payments TO other countries are (credits/debits).
  • Payments FROM other countries are (credits/debits)
A
  • Debits
  • Credits
81
Q

What are the 3 main areas in the Balance of Payments?

A
  1. Current account
  2. Capital account
  3. Official reserves
82
Q

What main area in the Balance of Payments does this describe:
tracks tangible goods such as services and intangibles such as aid. (basically your imports and exports)

A

Current account

83
Q

What main area in the Balance of Payments does this describe:
tracks financial assets and liabilities, direct investment, portfolio investment, short-term capital flows.

A

Capital account

84
Q

What main area in the Balance of Payments does this describe:
reflect gold imports and exports. (includes Foreign Direct Investment and gold reserves)

A

Official reserves

85
Q

Current account ________ may mean economic problems such as inflation OR that demand into the country exceeds outward flows.

A

deficit

86
Q

Surplus or deficit: when a country imports more than they export.

A

deficit
(U.S. has been in a balance of trade deficit for many years now)

87
Q

Is a balance of trade deficit a good or bad thing?

A

It depends. If you’re using that to import what you need, then that frees you to focus on exports and you export more, then that’s a good thing.

88
Q

T or F: The Bretton Woods System led to minimal growth in international trade but helped to reduce inflation levels.

A

False

89
Q

T or F: The International Monetary Fund uses the U.S. dollar as its unit of account.

A

False

90
Q

T or F: In a currency board arrangement, a country’s government commits to adopt the currency of another.

A

False

91
Q

T or F: The law of one price states that in an efficient market, like products will never have like prices.

A

False

92
Q

T or F: Countries put limitations on the convertibility of their currencies when they are concerned that their foreign reserves could be depleted.

A

True

93
Q

T or F: The balance of payments (BOPs) is a record of a country’s transactions with its major trading partners.

A

False

94
Q

T or F: The United States in recent years has had a significant deficit in its current account. This means that the U.S. citizens are exporting more than they are importing.

A

False

95
Q

Bretton Woods led to an exchange rate agreement known as the Bretton Woods System or:
a. the floating rate system
b. the India Accord system
c. the gold exchange standard
d. the French rate system

A

c. the gold exchange standard

96
Q

Who took the United States off the gold system?
a. President Eisenhower
b. President Kennedy
c. the Supreme Court
d. President Nixon

A

d. President Nixon

97
Q

Problems of the gold standard include:
a. storage cost, weight, doesn’t earn interest.
b. nations’ willingness to agree to it.
c. its interference in the jewelry market.
d. its purity levels.

A

a. storage cost, weight, doesn’t earn interest.

International Business (10 decks)

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