T5 Foreign Exchange

Question 1

If the Fed sells 1b of its foreign assets in exchange for 1b of US currency the feds purchase of dollars has 2 effects

Answer 1

1. Reduces Feds holding of int reserves by 1b
2. Feds purchase of currency removes it from hands of public, currency in circulation falls by 1b.

Question 2

Unsterilised foreign exchange intervention

Answer 2

central bank allows the purchase or sale of domestic currency to have an effect on the monetary base

Question 3

An unsterilized intervention in which domestic currency is sold to purchase foreign assets leads to a gain in international reserves, an increase in money supply, and a depreciation of the domestic currency

Answer 3

Question 4

Question 5

Balance of Payments

Answer 5

record and sum of all payments and transactions made by a country In a year

Question 6

Current account

Answer 6

-Int transactions that involve currently produced g+s
-Trade balance: difference between merchandise exports & imports. Trade deficit and trade surplus
Net receipts: cash flows received from abroad - cash flows sent abroad from 3 categories (investment income, service transactions, unilateral transfers (foreign aid, gifts)

Question 7

Capital account

Answer 7

Net receipts from capital transactions e.g. purchase of stocks and bonds.
Sum of these 2 is the official reserve transaction balance: net change in gvt international reserves

Question 8

should we worry about the large current account deficit

Answer 8

Indicates current ER, foreign demand for exports are less than our demand for foreign goods

A CA deficit means foreigners claim on domestic assets is growing