Chp 16: Exchange rates and Balance of payments

Question 1

Exchange rate

Answer 1

refers to the value of one currency in terms of another currency

the rate at which one currency can be exchanged for another

Question 2

Foreign exchange

Answer 2

refers to the foreign national currencies that is for any country, it refers to currencies other than its own

Question 3

Free floating exchange rate

Answer 3

an exchange rate that is determined entirely by demand and supply of the currency with not government intervention or central bank intervention in foreign exchange market

Question 4

Appreciation

Answer 4

increase in the value of currency in a floating exchange rate

Question 5

Depreciation

Answer 5

fall in the value of a currency in a floating exchange rate

Question 6

Foreign direct investments

Answer 6

investment by multinational corporations in productive facilities

Question 7

Portfolio investment

Answer 7

financial investment including investment in stocks and bonds

Question 8

Remittance

Answer 8

a transfer of money from one country to another, in most cases by foreign workers who send money from their earnings in the country of residence to their family in their home country

Question 9

Currency speculation

Answer 9

involved buying and selling currencies to make a profit from changes in exchange rates

Question 10

Fixed exchange rate

Answer 10

an exchange rate fixed by the country’s government or central bank at a certain level in terms of another currency, hence not permitted to adjust to currency demand and supply, requires constant central bank intervention to maintain fixed level. This intervention takes place in the form of buying and selling reserve currencies by central bank.

Question 11

Devaluation

Answer 11

a decrease in the value of a currency in a fixed exchange rate system achieved through the government and central bank which decide upon a new lower exchange rate for the currency

Question 12

Revaluation

Answer 12

an increase in the value of a currency in a fixed exchange rate system achieved through the government or central bank which decides upon a new higher exchange rate for the currency

Question 13

Managed exchange rate

Answer 13

exchange rates determined largely by market forces of demand and supply but where the central bank intervenes at times by buying and selling foreign exchange to avoid sharp short term fluctuations and influence the value of exchange rates

Question 14

Pegged exchange rate

Answer 14

a pegged currency is allowed to fluctuate within a narrow range above and below the target exchange rate

Question 15

Overvalued currency

Answer 15

currency whose value is maintained higher than its market equilibrium level

Question 16

Undervalued currency

Answer 16

a currency whose value is maintained lower than its market equilibrium level

Question 17

Balance of payments

Answer 17

a record of all transactions between residents of a country with residents of all other countries consisting of all payments entering into the country from abroad (inflows) and all payments leaving a country to go abroad (outflows) over a period of time consist of current account, capital account and financial account which in the course of a year add up to 0

Question 18

Credit

Answer 18

all payments received from other countries

Question 19

Debits

Answer 19

all payments made to other countries

Question 20

Surplus account

Answer 20

whenever balance has a positive value meaning that credits are larger than debits

Question 21

Reserve assets

Answer 21

refers to foreign currency reserves that the central bank can buy or sell to influence that value of country’s currency