ER arrangements and intervention - Topic E

Question 1

What does a CB’s purchase of domestic currency and the following sale of foreign assets lead to?

Answer 1

An equal decline in its international reserves and the monetary base

Question 2

Monetary base meaning?

Answer 2

Total amount of currency in circulation or held in reserves

Question 3

Define unsterilized FOREX intervention

Answer 3

Involves buying/selling foreign currency using domestic currency reserves

Question 4

Define the balance of payments

Answer 4

Bookkeeping system for all receipts and payments (priv sector and govt) that have a direct relation to the movement of funds between a nation and foreign countries

Question 5

Key aspects of BOP?

Answer 5

Current account (trade balance (net exports) + net receipts (cash flows from abroad - cash flows sent abroad)

Capital account (net receipts from capital transactions, e.g. purchase of stocks/bonds)

Sum of both = official reserve transactions balance (can be in surplus or deficit)

Question 6

Why are persistent trade deficits a cause of concern?

Answer 6

Shows at current ERs, foreign demand for our exports is far less than our demand for foreign goods

Foreigners’ claims on domestic assets are growing (larger ownership stake of domestic assets) > vulnerable to external shocks