Lecture 4

Question 1

International money system

Answer 1

system of institutions and mechanisms to foster international trade, manage flow of financial capital, determine currency and exchange rates

Question 2

Currency exchange markets

Answer 2

electronic markets where banks and institutional trader buy and sell currencies

Question 3

Currency exchange rate

Answer 3

value of one currency relative to another

Question 4

Direct quotation method

Answer 4

amount of a home country currency needed to purchase one unit of foreign currency

Question 5

Indirect quotation method

Answer 5

number of units of foreign currency needed to purchase one unit of home country currency

Question 6

Exchange rate conversion equation

Answer 6

IQ= 1/DQ

Question 7

Spot exchange rate

Answer 7

current rate quotes for delivery of currency on the spot

Question 8

Currency appreciation

Answer 8

increase in currency’s value

Question 9

Currency depreciation

Answer 9

decrease in currency’s value

Question 10

Change in foreign currency equation

Answer 10

%FC = SR(t) - SR(t-1) / SR(t-1) x 100

Question 11

Equilibrium exchange rate

Answer 11

currency exchange rate where supply and demand for a currency are in balance

Question 12

Purchasing Power Parity

Answer 12

currency of country with lower inflation rate will appreciate relative to currency of country with higher inflation rate

Question 13

Simplified PPP equation

Answer 13

%FC - InfR(hc) - InfR(fc)

Question 14

Accurate PPP equation

Answer 14

%FC = [(1 + InfR(hc)) / (1 + InfR(fc)] - 1

Question 15

International fisher effect

Answer 15

currency of country with lower nominal interest rate will have currency appreciate relative to country with higher interest rate

Question 16

IFE equation

Answer 16

%FC = (1 + IntR(hc) / 1 + IntR (fc) ) - 1

Question 17

Political risk

Answer 17

risk that national government may confiscate assets held by foreigners, low risk = strongr currency

Question 18

Economic risk

Answer 18

risk of slow or negative economic growth, higher economic growth = stronger currency

Question 19

Arbitrage

Answer 19

the nearly simultaneous purchasing of commodities, securities or currencies in a market then selling them where the price is higher