Class 3 (ch. 2 + 3)

Question 1

What is the main objective of the world bank?

Answer 1

Providing loans to other nations that need capital, such as helping countries develop airports, shipping and more to reduce poverty and promote economic growth

Question 2

What is the International Monetary Fund (IMF)?

Answer 2

Institution designed to promote global monetary cooperation, facilitate international trade, and provide financial assistance to countries facing balance of payments problems

Question 3

What is productivity of a country

Answer 3

It is their value as a country. The higher the countries productivity, the more you are able to produce, the higher your value

Question 4

What are the two ways a currency is established?

Answer 4

1) Hard peg
2) Soft peg

Question 5

What is a hard peg?

Answer 5

It is a currency that is determined by another countries currency. Some countries peg themselves to other currencies who they often trade with and so on at a fixed exchange rate.
Another example of hard peg is some countries using another countries currency (ex: Ecuador using USD)

Question 6

What is a soft peg?

Answer 6

Where a company pegs themselves to another country but allows for fluctuation within a certain range

Question 7

Who tends to determine the value of a currency?

Answer 7

The government with the amount of money they print, buying bonds, etc

Question 8

Does most of the world have a pegged or a free floating currency

Answer 8

1/3 of the world has a free floating currency (they’re own currency). Over 40% of countries have soft pegs

Question 9

Name some pros of having your own currency

Answer 9

-can print money if needed
*-easier to invest (not relying on the middle man which is usually the currency that you are pegged to)

Question 10

Name some cons of having your own currency

Answer 10

If we think of the Euro, which is the same currency for multiple countries:
-if one country underperforms, it has an impact on all of the currency
-the ability to cure a bad performance depends of the same currency to fix it (ex: when Greece went bankrupt, they affected the value of the euro all together then they also needed more money (euro) in order to get back up and running which is a sort of “double trouble”)

Question 11

What is Balance of Payment (BOP)?

Answer 11

it is the inflow and outflow of currency

Question 12

In BOP, what is a credit?

Answer 12

It represents foreign exchange earned (inflow)

Question 13

In BOP, what is a debbit?

Answer 13

It represents foreign exchange spent (outflow)

Question 14

What is BOP made up of? (5)

Answer 14

-Current account
-Capital account
-Financial account
-Official reserves account
-Net errors and omissions account

Question 15

What are the 3 subsections of current account

Answer 15

1) trade balance
2) income
3) capital account

Question 16

What is trade account under current account

Answer 16

The difference between exports and imports of goods and services. A trade surplus occurs when exports are bigger than imports, while deficit in trade is the opposite

Question 17

What is income under current account

Answer 17

Includes earnings from investments (like dividends and interest) and compensations of employees working abroad

Question 18

What is current transfers under current account

Answer 18

Transfers of money for which no goods or services are exchanged such as remittances from citizens living abroad or foreign aid

Question 19

What is the capital account

Answer 19

Records all transactions involving purchase and sale of assets which can be foreign investments, portfolio investments and other investments

Question 20

What are the 3 subsections of the financial account under BOP

Answer 20

1) direct investments
2) portfolio investments
3) other investments

Question 21

What are direct investments under financial account

Answer 21

Investments made to acquire a lasting interest in an enterprise (ex: building) that has a 10% threshold

Question 22

What are portfolio investments under the financial account of BOP

Answer 22

Investments in financial assets, like stocks and bonds below the 10% threshold

Question 23

What is included under other investments in the financial account of BOP

Answer 23

Includes loans and deposits

Question 24

What is official reserves? (name gives it away)

Answer 24

It is the reserve of cash held by a country. Usually the holdings refer to currencies that are dealt in international trade such as the US dollar, Euro, Japanese Yen, gold, etc

Question 25

What is net errors and omissions account

Answer 25

Accounts for the discrepancies between the recorded inflows and outflows, ensuring the BOP balances out

Question 26

What are fixed exchange rates under gold standard?

Answer 26

Currencies that are pegged to a certain amount of gold

Question 27

What is convertibility in terms of exchange currencies under gold standard?

Answer 27

It is where individuals and businesses can exchange their currency for gold at the established rate, providing a guarantee of the currency’s value

Question 28

What is limited money supply in terms of exchange currencies under gold standard?

Answer 28

The money supply is limited to the amount of gold a country has on hand which restricts the ability of printing money, to control inflation

Question 29

What are 3 pros of the gold standard?

Answer 29

1) Stability
2) trust
3) discipline

Question 30

What are 3 cons of the gold standard?

Answer 30

1) inflexibility
2) deflationary pressures
3) resource contraints

Question 31

What is the “impossible trinitiy”

Answer 31

it is a concept that states that international economies CAN’T achieve all of the following three things:
1) stable exchange rate
2) free capital mobility
3) independent monetary policy