T5 Foreign Exchange Flashcards
If the Fed sells 1b of its foreign assets in exchange for 1b of US currency the feds purchase of dollars has 2 effects
- Reduces Feds holding of int reserves by 1b
- Feds purchase of currency removes it from hands of public, currency in circulation falls by 1b.
Unsterilised foreign exchange intervention
central bank allows the purchase or sale of domestic currency to have an effect on the monetary base
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
Balance of Payments
record and sum of all payments and transactions made by a country In a year
Current account
-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)
Capital account
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
should we worry about the large current account deficit
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