International Finance

Question 1

What is the IMS

Answer 1

International Monetary System

Question 2

What does the IMS do

Answer 2

determines foreign exchange rates,

accommodates international trade and capital flows,

adjusts balance-of-payments

Question 3

What are the two main categories of the IMF

Answer 3

Floating - supply and demand determines the value of currency

fixed - value of currency relative to gold, or a basket of currencies

Question 4

What is a soft peg

Answer 4

stable value against another currency

Question 5

what is a hard peg

Answer 5

legal use of another country’s currency or a requirement to maintain account with foreign currency equal to amount of domestic currency in circulation

Question 6

What is devaluation of a currency

Answer 6

a drop in foreign exchange value of a currency that is pegged.
opposite: revaluation

Question 7

what is depreciation, weakening, or deterioration of a currency

Answer 7

drop in a foreign exchange value of currency that is floating
opposite: appreciation or strengthening

Question 8

what is soft or weak currency

Answer 8

currency that is expected to devalue or depreciate relative to major currencies

Question 9

what are strong or hard currencies

Answer 9

currency that is expected to revalue or appreciate relative to major trading currencies

Question 10

What can a weak currency cause

Answer 10

benefits a country’s exports
spurs inflation
creates high volatility in investments
lead to a flight out of the currency to another currency
difficulty repaying debt

Question 11

what are some benefits of a fixed rate regime

Answer 11

promotes international trade, promotes foreign investments, promotes low inflation

Question 12

What is non-sterilized intervention

Answer 12

direct market intervention to weaken/strengthen a domestic currency requires the sale/purchase of a domestic currency on international markets

Question 13

what is sterilized intervention

Answer 13

inflationary pressure my be sterilized by simultaneously issuing domestic government debt with the direct market intervention

Question 14

What is a currency board

Answer 14

When a country’s central bank always commits to back it monetary base entirely with foreign reserves

Question 15

What is dollarization

Answer 15

use of the US dollar as the official currency of the country

Question 16

what are attributes of the “ideal currency”

Answer 16

“The Impossible Trinity”
Exchange rate stability
Full financial integration
monetary independence

Question 17

What is exchange rate stability

Answer 17

traders and investors are relatively more certain of foreign exchange value

Question 18

what is full financial integration?

Answer 18

complete freedom of monetary flows so traders and investors can more easily move funds from one country to another to exploit economic opportunities

Question 19

what is monetary independence

Answer 19

monetary and interest rate policies can be set by each country individually to achieve desired national economic policies - combats inflation, recession, and unemployment

Question 20

What is “De jure”

Answer 20

a country’s own identification of exchange rate regimewh

Question 21

what is “de facto”

Answer 21

observable exchange rate regime

Question 22

What does a foreign exchange market provide

Answer 22

institutional structure through which the money of one country is exchanged - rates and settlement

Question 23

What are the two tiers in the foreign exchange market?

Answer 23

Interbank - wholesale
Retail

Question 24

Who are the five broad categories of participants in the foreign exchange market

Answer 24

Banks and nonbank foreign exchange dealers
foreign exchange brokers
firms and individuals
speculators and arbitrageurs
central banks and treasuries

Question 25

What is BOP

Answer 25

Balance of Payments - International Business Transactions

Question 26

Is are the three primary sub accounts of a BOP

Answer 26

Current Account
Capital Account
Financial Account