Term
| If the exchange rate between the US dollar and the British pound changed from $1.65 to $1.56 what is the perchantage of change against the the US dollar? |
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Definition
| Depreciation: Old-New/ Old = (1.56-1.65)/ 1.65 = -5.45 |
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Term
Using the following informaiton Caculate the Current Account Balance for the US under these conditions
- Private Savings = $1,900 Billion
- Private Investment= $1,100Billion
- Fed Budget Deficit =$1,300 Billion
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Definition
[CAB]= +[Private Savings]-[Private Investment]-[Government Def]
$1,900-1,100-1,300= -500Billion |
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Term
| The Inflation rate in the US is expected to average 2% while in mexico it is expected to average 4%. The recent exchange rate between the US$ and the Mexican peso has been Mex$=US$.0729. What is the expected exchange rate in 3 years |
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Definition
Expected Exchange rate
ex=.((0729))x(1+.02)^3/(1.04)^3=.0688 |
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Term
| A___ US dollar ____foreign investors to purchase assets in the US; while a ___dollar ____such investments |
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Definition
| Weak; Encourages; Strong; Discourages |
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Term
| A controlled exchange Rate system normally goes hand in hand with an _____Local currency |
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Definition
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Term
| The Primary Objective of the multinational corporation is to |
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Definition
| Maximize shareholder wealth |
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Term
| ______Is defined as the purchase of assets or commodities on one market for immediate resale on another in order to profit from price discreprancy |
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Definition
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Term
| In a freely, floating exchange rate system, if a country's current account Is running a defict |
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Definition
| The financial account will likely run a surplus |
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Term
| Recent US trade deficits can be attributed to: |
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Definition
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Term
| Which of the following would no be benefit to the countries usuing the Euro as their common currency ? |
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Definition
| Increased control over monetary policy |
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Term
| The exchange rate between the Euro and the traditional currencies of the EMU country is |
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Definition
| A fixed exchange rate system |
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Term
| During 2010 the US largest Trade deficit was with _____,while our largest Trade surplus was with_____ |
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Definition
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Term
| Over the past 25 years the US trade deficit has ____during periods of economic_____, and _____during periods of economic_____ |
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Definition
| Increased; Expansion;decreased; contraction |
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Term
| Internation____ can reduce the volatility of an investment portfolio because national finacial markets tend to move independently of each other |
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Definition
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Term
| The multinational financial system enables companies to? |
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Definition
| Avoid currency controls, reduces taxes, and Access lower cost of financing sources |
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Term
| Under which one of the following systems is there no central bank |
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Definition
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Term
| If a foreigner purchases a US government security |
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Definition
| The demand for the dollars rises |
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Term
| Which one of the follwoing effects would MOST likely be caused by a government artificially holding its currency value down? |
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Definition
| The value of the nations exports rises dramatically |
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Term
| The Characteristics of gold that is most important to the success of a gold standard is that it is |
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Definition
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Term
| In a fixed-rate system, central banks maintain currency values by |
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Definition
| Buying undervalued currencies in the foreign exchange market |
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Term
| The Theory of Relative purchasing power Parity states that, between two nations, the |
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Definition
| Exchange Rate difference reflects the inflation rate difference |
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Term
| The Fisher Effect states that the _____rate is made up of a real required rate of return and an inflation premium |
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Definition
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Term
| The Purchase of currency on one market for immediate resale in another market in order to profit from the rate discrepancy is known as ____ |
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Definition
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Term
| An overvalued currency acts as a(n) ___on exports and a(n) ____to imports. |
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Definition
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Term
| In a freely floating exchange rate system, if the finacial account is running a deficit ... |
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Definition
| The current account must run a surplus |
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Term
| Political Risk is Primarily a function of : |
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Definition
| Uncertainty over property rights |
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Term
| In Order to reduce its current account deficit the US must do which of the following ? |
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Definition
| Reduce the Federal Budget Deficit |
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Term
| According to the J-Curve Theory, a country's trade deficit... |
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Definition
| Increases just after its currency depreciates |
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Term
| The Convergence Criteria for the European Monetary Union included which of the following economic standards |
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Definition
| Inflation, Interest rates, annual fiscal deficit, and national government debt. |
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Term
| Which of the following is not a relationship that supports the law of one price |
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Definition
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Term
| Until Recently, the personal savings rate in the US has been ______ than most developed countries, and has been ____. |
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Definition
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Term
| The International Fisher Effect says that the expected home country Real rate of return on financial assets will be: |
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Definition
| None of the above listed it does however say that currencies with low interest rates are expected to appreciate relative to currencies with high interest rates |
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Term
| Which of the following economic forces has not been a factor in changing the global competitive enviornment ? |
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Definition
| Increased "statism"--state ownership of production facilities |
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Term
| Which of the following factors affects the equilibruim exchange rate between two currencies |
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Definition
| all of the above, Relative inflation rates, Relative interest rates, Economic Growth Rates and Political Risk |
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Term
| Which of the following countries is frequently accused of following a currency policy of mananged or "dirty" float? |
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Definition
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Term
| An Increase in the current account deficit will place ____pressure on the value of the home currency, other things equal. |
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Definition
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Term
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Definition
| Long-run price stability includes alternating periods of inflation and deflation |
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Term
| Which of the following is an example of direct intervention in the foreign exchange market |
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Definition
| Exchanging dollars for foreign currency |
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Term
| Important Indicators of country Risk are: |
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Definition
| Having a controlled exchange rate |
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Term
| List some changes in the global competetitve enviornment |
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Definition
-Massive Deregulation
-Collapse of Communism
- Large scale Privatilization
- Revolution in information technology |
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Term
| Foreign Direct Investment |
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Definition
Portfolio Management- foreign investor purchases securities w/o exercising control.
Direct Investment- Construction of new facilities or aquuirring control of an existing local firm |
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Term
| Multinational Corporation Described |
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Definition
A company engaged in producing and selling goods or services in more than one country..a parent company located in the home country..five or six foreign subsidiaries typically with a high degree of strategic interaction
Unanticipated by classical economic theory (comparative advantage)
which is said that goods and services can move but not factors of (production, Labor and land). |
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Term
| Reasons For Going International |
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Definition
-Raw material Seekers
-Market Seekers
-Cost Minimizers
-Knowledge seekers
-Keeping domestic customers
-Exploiting financial markets |
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Term
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Definition
-Increased competition among businesses
-Increased innovation
-Higher Productivity
-Lower Prices and greater choice for consumers
-Rising wages for workers
-Higher Living standards |
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Term
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Definition
| Price of the foreign exchange with the same day payment |
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Term
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Definition
| Rate quoted today for delivery at a fixed future date (30, 90, and 180 days |
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Term
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Definition
| Increase in stated par value of a pegged currency |
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Term
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Definition
| Decrease in stated par value of a pegged currency |
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Term
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Definition
-No central bank no discretionary monetary policy
-Currency is convertibile at a fixed rate into foreign reserve currency, frequently the US
- Board holds foreign securities as reserves 100% |
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Term
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Definition
Replacement of the local currency with the US dollar
-Expectation of Price Stability
-Sacrifice of National Identity and Pride |
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Term
| What Determines Exchange Rates |
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Definition
-Economic Factors
-Political Factors
Social Factors |
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Term
| Fed adopts easy money policy. How is this likely to affect the value of the dollar and us interest rates |
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Definition
| This policy makes money easier to borrow, it is used in times of recession or economic hardship...free's up short term capital. It increases the value of the dollar in which countries that hold our debt start to sell to cap their upside and we are left holding the bill |
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Term
| Alternative Exchange Rate Systems |
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Definition
(Free "Clean" Float)- Supply and demand for currency, Price level changes"inflation",Interest rate differentials, Economic growth, Exchange rates fluctuate randomly and adjust quickly to ne information
(Managed "Dirty" Float System)- Central bank intervention, reduce economic uncertainty, impact domestic economy, appreciation(reduces exports), Depreciation (higher inflation) Categories: 1.) smoothing daily fluctuations, 2.) leaning against the wind and 3.) Unofficial pegging
(Fixed Rate System)- Target exchange rates, Central bank buys and sells currency to maintain rates, coordinated monetary policy, same inflation each country, |
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Term
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Definition
-Maastricht Treaty (Feb 7th 1992)
- Single Central Bank
- Single European currency
-Lower currency conversion cost
-Eliminate the risk of currency fluctuations
-Encourage trade and investment
_efficient allocation of resources
_coordination of monetary policy
-Similar inflation rates |
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Term
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Definition
Enforced by arbitragers- buy in one market and sell in another market,
Risk adjusted expected returns on financial assets in different markets should be equal. |
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Term
| THE LAW OF ONE PRICE: 5 Key Economic Relationships |
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Definition
Purchasing power Parity
Fischer Effect
International Fischer Effect
Interest Rate Parity
Forward Rates as unbiased predictors of Future Spot Rates |
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Term
THE LAW OF ONE PRICE: 5 Key Economic Relationships
1.Purchasing Power Parity |
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Definition
“The Ratio between domestic and foreign price levels should equal the equilibrium exchange rate between domestic and foreign currencies”. The absolute version of PP Ignores the following
• Transportation cost
• Tariffs and Quotas
• Product differentiation
The relative version says that the exchange rate between the home currency and any foreign currency will adjust to reflect changes in the price levels of two countries
Formula of (PPP) = Et/e0=(1+ih)^t/(1+if)^t or ( price level of home/price level of foreign)*exchange rate to find E
The exchange rate change during a period should equal the inflation differential for that period, Currencies with high rates of inflation should devalue relative to currencies with low rates of inflation |
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Term
THE LAW OF ONE PRICE: 5 Key Economic Relationships
1.Fischer Effect |
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Definition
Nominal Interest rate (r) consists of:
-Real Required rate of return, (a)
-An inflation premium (i)
- 1 +r= (1+a)(1+i)
-Real Returns are equalized across countries through arbitrage
-This states that currencies with high rates of inflation should bear higher interest rates than currencies with lower rates of inflation |
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Term
THE LAW OF ONE PRICE: 5 Key Economic Relationships
1.International Fischer Effect |
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Definition
Currencies with low interest rates are expected to appreciate relative to currencies with higher interest rates:
-The expected home country returns from investing at home and abroad should be equal. |
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Term
THE LAW OF ONE PRICE: 5 Key Economic Relationships
1.Intrest Rate Parity |
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Definition
| Also Known as covered arbitrage, " a condition where the interest rate differential is approximately equal to the forward differential between the two currencies. |
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Term
THE LAW OF ONE PRICE: 5 Key Economic Relationships
1.Forward Rates as Unbiased Predictors of Future Spot Rates |
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Definition
- The Forward rate should reflect the expected future spot rate on the date of settlement
-f1=e1
- |
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Term
| What factors would you look for in assessing the political riskiness of an investment in eastern Europe? |
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Definition
Large government deficit relative to GDP
· High rate of money expansion, esp if it is combined with a relatively fixed exchange rate
· Substantial government expenditures yielding low rates of return
· Price controls, interest rate ceilings, trade restrictions, rigid labor laws, and other barriers to smooth adjustment of economy to changing relative prices
· High tax rates that destroy incentives to work, save, invest.
· Vast state owned firms run for benefit of the managers and owners not workers
· Government ability to maintain standard of living
· Corruption
· Legal system
Positives
· Structured incentives that reward risk taking in productive ventures. Low taxes
· Legal structure that stimulates the development of free markets.
· Minimal regulations and economic distortions
· Clear incentives to save and invest
· An open economy
· Stable macroeconomic policies |
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Term
| Japan underwent recession that brought about prolonged slump in consumer spending and capital investment. What would happen with the US trade deficit with japan? |
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Definition
| Japan economy would improve jobs would move over to Japan like they have done with china |
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Term
| pros and cons of brittain joining the EMU. |
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Definition
1. No Devaluation. In the Euro, you can’t devalue if your currency becomes uncompetitive. This has been a significant problem for Euro countries like Spain, Italy and Greece. Compared to Germany, these countries have seen higher wage growth, higher inflation and lower productivity growth. This means their exports become uncompetitive leading to lower demand and lower growth.
This is reflected in large current account deficits in these southern EU economies.
By contrast, the UK has been able to devalue, restoring our competitiveness and giving our economy more flexibility.
2. No Independent Monetary Policy. In the Euro, interest rates are set by the ECB for the whole Eurozone area. However, this monetary policy may not be good for the UK economy. In 2008, the UK was very hard hit by the financial crisis. In response, the UK could cut interest rates very quickly. Also the Bank of England were able to pursue quantitative easing to try and stimulate economic activity. If the UK were in the Euro, it would not be able to do this. Therefore, I believe the UK recession of 2008-11 would have been even deeper, if we didn’t have an independent monetary policy.
In an economic cycle, if the Euro economy recovers before the UK economy, ECB interest rates may increase too quickly and harm the UK’s recovery. For example, in 2011, the ECB raised interest rates because of fears over inflation. Yet, in 2011, the UK economy was slipping back into recession. An increase in interest rates would have been very damaging for the EU economy
3. UK Housing Market. The nature of the UK housing market means that the UK is very sensitive to interest rates. In the UK, many home-owners have high variable mortgages. This means a small increase in interest rates has a big effect on consumer spending. Therefore, it is even more important that interest rates are not unsuitable for the UK economy.
4. No Lender of Last Resort. The Current Euro debt crisis shows that countries in the Euro are more susceptible to rising bond yields. Countries in the Euro have no central bank to act as a lender of last resort. This means, if government is struggling to sell sufficient bonds in a particular month, investors will panic and sell bonds. In the UK, the Bank of England would step in and buy sufficient bonds to avoid a liquidity crisis. Therefore, countries in the Euro are facing much higher interest rates to reflect the nervousness of investors about liquidity fears. (see: lender of last resort)
5. ECB overly concerned with inflation. The ECB have an over-riding objective of low inflation. Arguably this is at the expense of promoting economic growth and inflation. In response to a small degree of cost push inflation, the ECB raised interest rates, showing to markets they were willing to risk core-inflation falling below target, despite low growth or recession in parts of the Eurozone. The Bank of England by contrast, tolerated a higher rate of inflation because they felt more important to avoid a double-dip recession.
6. Irreversible Decision. Once in the Euro, it is very hard and very costly to reverse the decision. See: difficulties in leaving the Euro
See more problems of the Euro
Reasons to Join the Euro
Lower transaction costs for tourists and firms. However, relatively small % of business costs
Insulation against exchange rate fluctuations. Helps exporters to know future costs and incomes.
Helps UK to be at the heart of the Eurozone and have greater influence over policy making. |
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Term
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Definition
| - net value of all economic transactions- including trade in goods and services, transfer payments, loans and investments between residents of the same country and those of other countries. |
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Term
| Balance Of Payments Accounts List all (5) |
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Definition
1.) Current Account
2.) Capital Account
3.) Financial Account
4.) Errors and Omissions
5.) Reserves and Related Items |
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Term
| Balance of Payments Accounts: Current Account |
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Definition
| Goods -Services = Net Amount |
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Term
| Balance of Payments Accounts: Financial Account |
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Definition
-Direct Foreign Investments
-Portfolio Investment
-Other capital investments, short term financial transactions |
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Term
| Balance of Payments Accounts: Capital Account |
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Definition
| -Debt Forgiveness, Assets transferred by people who move from one country to another, sale of patents or trademarks |
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Term
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Definition
| We need to attract 1.2 Billion in foreign investment a day to stay afloat |
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Term
| 7 Reasons why americans Save so Little |
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Definition
-Credits easy and debt carries no stigma
-someone or something will bail me out
-False sense of financial security
-Its the tax code stupid
- Seize it all is the way to live
-I'll work till my grave |
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Term
| How to cope with the Trade deficit |
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Definition
Currency depreciation
Protectionism
end foreign ownership of US comapanies
Increase the savings rate |
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Term
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Definition
- Overvalued currency
---Tax on exports, subsidy to imports
-weaker currency should reduce deficits
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Term
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Definition
- Political Stability- Currency controls, Trade controls, Tax and Labor laws, Regulatory restrictions and Local and production requirements; frequency of government changes, levels of violence, and conflict with other states,
-Economic Factors- Inflation, Balance of payments, growth rate per GDP,"In general the better a country's economic outlook the less likely it is to face political and social turmoil that will inevitably harm foreign countries
-Subjective Factors -Attitude towards private enterprise, multinationals and FDI |
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