ECON 4040: Final Exam
25 Cards in this Set
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Reason for holding foreign currency
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1. trade and investment
2. interest rate arbitrage
3.speculation
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interest rate arbitrage
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borrow where rates are low, loan where rates are high
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speculation
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predicting exchange rate movements
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spot
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buying and selling in the present
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exchange rate risk
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expected future payments in a foreign currency will differ from the current amount if the exchange rate changes
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forward contracts
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specify a future transaction date and will take the exchange rate of when the contract was set
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law of one price (individual commodity)
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identical goods sold in different countries must sell for the same price when price is expressed in terms of the same currency. This occurs in competitive markets free of transportation and barriers of trade.
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purchasing power parity
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an exchange rate is at the level where a given amount of money can by the same quantity of goods abroad as it will buy at home
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business cycle
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natural but irregular rhythms of expansion and recession that every country undergoes
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real exchange rate
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the market (or nominal) rate adjusted for price differences
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devalue
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more units must be exchanged for 1 unit of foreign currency
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revalue
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domestic currency is more valuable and fewer units exchanged for 1 unit of foreign currency
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capital flight
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a large and sudden movement of funds out of a country into another one
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expenditure switching
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changing trade balance between X and M
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expenditure reducing
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reducing M
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statistical discrepancy
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the amount by which current+capital+financial accounts don't = 0
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balance of payments
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current, capital and financial account=0
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sudden stop
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a large outflow of financial capital and stopping of flow of financing
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Gross Domestic Product
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The market value of all final goods and services produced within a country during a given time period
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Gross National Product
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The market value of all final goods and services produced anywhere by a country's resources in a given time period
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private savings
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the part of disposable income that is saved rather than consumed
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government savings
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tax revenue minus government expenditures
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international debt
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money owed to nonresidents that must be paid in foreign currency
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debt service
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principal and interest repayment
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ideally
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foreign loans will be used to increase skills, productivity and capacity will be easily repaid
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ECON 4040: Study Guide