International Finance Flashcards
A system of managed floating exchange rates is
a system in which governments may attempt to moderate exchange rate movements without keeping exchange rates rigidly fixed
Any central bank purchase of assets automatically results in an _____ in the domestic money supply, while any central bank sale of assets automatically causes the money supply to ______
increase, decrease
By fixing the exchange rate, the central bank gives up its ability to
influence the economy through monetary policy
Currency crises may result from
speculative attacks on the currency or central banks purchasing excessive amounts of government bonds
A balance of payments crisis is best described as
a sharp change in foreign reserves sparked by a change in expectations about the future exchange rate
By internal balance, most economists mean
full employment and price stability
by external balance, most economists mean
avoiding excessive imbalances in international payments
The components of the monetary trilemma that is encountered when a country chooses its monetary policy are
Exchange rate stability, monetary autonomy/policy oriented toward domestic goals, freedom of international capital movements
Under the Gold standard, a country is said to be in balance of payments equilibrium when the current account balance is
financed entirely by international lending without reserve movements
The dollar of the US became the postwar world’s key currency because of all EXCEPT
the ease of transporting US dollars compared with other currencies
The Bretton Woods system was
a system that required participants to peg their currency to the US dollar, which was pegged to the price of gold
The collapse of the Bretton Woods system marked
the end of fixed exchange rates and a move to floating exchange rates
Fixed exchange rates are
exchange rates in which a currency’s value is “pegged” by a monetary authority against the value of another currency, a basket of other currencies, or another measure of value, such as gold.
Floating exchange rates are
exchange rates that are determined by the supply and demand of one currency in terms of another on the open market
Securitization is
the conversion of an asset, especially a loan, into marketable securities, typically for the purpose of raising cash by selling them to investors.
the main problem with securitization is that
governments are not able to monitor bank assets or to assess a banks risk to the soundness of the international banking system
a random walk model is
a model that takes today’s exchange rate as the best guess for tomorrows exchange rate
A random walk model can more accurately predict exchange rates as compared to a sophisticated forecast for up to ____ (day/month/year(s)) away
one year
Large differences in interest rates between countries would indicate that
there are unrealized gains from trade
U.S. reserve requirements
force banks to hold a portion of its assets in a liquid form easily mobilized to meet sudden deposit outflows
Capital inflows are
money invested by foreigners willing to take a stake in an economy
Capital outflows are
money taken out of an economy
The purpose of the Basel Committee was to
achieve a better coordination of the surveillance exercised by national authorities over the international banking system
The case where people purposely act in a careless way due to the incentive to is called
moral hazard
The EU countries were prompted to seek closer coordination of monetary policies and greater exchange rate stability in order
both to enhance Europes world in the world monetary system and to turn the European Union into a truly unified market
A ____ exchange rate (does/does not) automatically cushion the economy’s ______ and _____ by allowing an immediate change in the _____ price of domestic and foreign goods
flexible/floating, Does, output and unemployment, relative
The intersection of GG and LL determines
the minimum level of integration that will cause a country to join a fixed exchange rate regime
Optimum currency areas/fixed exchange rate regimes are
groups of regions with economies closely linked by trade in goods and services and by factor mobility
The theory of optimum currency areas predicts that
fixed exchange rates are most appropriate for areas closely integrated through international trade and factor movements
The benefits of joining a fixed-exchange rate area are
reduced transaction costs, less speculation on returns, less uncertainty about purchasing power of wages
The costs of joining a fixed-exchange rate area are
increased vulnerability to international economic conditions, benefits depend on the level of integration
compared with industrialized economies, most developing countries are poor in the factors of production essential to modern industry, which are
skilled labor and capital
How would you define convergence
tendency for gaps between industrial countries’ per-capita incomes to narrow
Seigniorage refers to
real resources a government earns when it prints money to use for spending on goods and services
A trend that has been reinforced by many developing countries is privatization. Privatization refers to
selling large state-owned enterprises to private owners in key areas such as electricity, telecommunications, or petroleum
there are many ways developing countries finance their external deficits EXCEPT
foreign exchange rates
the term Original Sin by two economists Barry Eichengreen and Ricardo Hausmann is used to describe what?
developing countries’ inability to borrow in their own currencies
How would you define exchange control?
the government allocates foreign exchange through decree rather than through the market
Since foreign credit dries up in crises when its most needed, developing countries can protect themselves from default by
accumulating high levels of international reserves
How would you define a currency board?
The monetary base is backed entirely by foreign currency and the central bank holds no domestic assets
What are the three main lessons on crisis learned from early developing countries in Latin America?
choosing the right exchange rate regime, the importance of contagion and the importance of the banking system
Information that a country must consider when deciding to peg the exchange rate includes
economic stability, trade patterns, foreign reserves, flexibility of monetary policy, capital mobility and financial stability
Serving as a reserve currency refers to
a foreign currency that is held in significant quantities by central banks or other monetary authorities as part of their foreign exchange reserves.
advantages of serving as a reserve currency include
enjoying seigniorage, significant monetary policy autonomy, lower borrowing costs, and influence in international financial institutions
disadvantages of serving as a reserve currency include
risk of currency appreciation and its impact on export competition, risk of financial instability as a result of large liabilities, and the responsibility of maintaining the stability of the currency
Liability dollarization is
when a significant portion of financial liabilities of a country are denominated in foreign currencies
the most frequent users of liability dollarization are ____-income economies/ _____ countries
low, developing
How can liability dollarization worsen a financial market disruption caused by a sharp depreciation of the domestic currency against the denominated currency?
Through increased debt burden, foreign exchange mismatch, weakened balance sheets, capital flight, macroeconomic challenges, and central bank interventions.
