Week 9

Question 1

What are the levels of economic integration (from most to least)
- economic union (EU 2003)
- Free Trade area (NAFTA)
- political union
- common market
- customs union

Answer 1

Free Trade => Customs union => common market => economic union => political union

Question 2

What are the 4 reasons businesses use the foreign exchange market

Answer 2

convert, make, invest, engage in

Question 3

Which currency is used within the borders of a country, in general, in the foreign exchange market?

Answer 3

The national currency

Question 4

Explain the “convert” function of the Foreign Exchange Market for businesses

Answer 4

Convert payments received for its exports, income received, from foreign investments, or income received from licensing agreements with foreign firms

Question 5

Explain the “Make” function of the Foreign Exchange Market for businesses

Answer 5

Make payments to a foreign company for its products or services in its country’s currency

Question 6

Explain the “Invest” function of the Foreign Exchange Market for businesses

Answer 6

Invest cash for short terms in foreign money markets

Question 7

Explain the “Engage in” function of the Foreign Exchange Market for businesses

Answer 7

Engage in currency speculation

Question 8

Name some examples of regional integrations

Answer 8

EU, CUSMA, Mercosur (Argentina, Brazil, Paraguay, Uruguay - Venezuela suspended), Andean (Bolivia, Chile, Ecuador, Peru, Columbia), ASEAN (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam), TFTA - Tripartite Free Trade Agreement (26 African nations), Trans-Pacific Partnership (TPP) (US pulled out, Australia, New Zealand, Japan, South Korea, Malaysia, Chile), The Comprehensive Economic Partnership (RCEP) comprises all 10 members of ASEAN + Australia, China, Japan, New Zealand, and South Korea

Question 9

What are the functions of the foreign exchange market? (4)

Answer 9

• insuring against foreign exchange risk
• spot exchange rates
• forward exchange rates
• currency swaps

Question 10

FITB: Economic theories of exchange rate determination
a) Comparison of prices of identical products determine the real or ____ exchange rate
b) An efficient market has no impediments to the ___ ___ of goods and services
c) Exchange rate = ?

Answer 10

a) PPP
b) Free flow
c) P$/PFC