IB Economics Chapter 14 – Flashcards
Unlock all answers in this set
Unlock answersquestion
transactions
answer
dealings of any kind involving money
question
foreign exchange
answer
transactions that involve the use of different national currencies
question
exchange rate
answer
the value of one currency to another
question
freely floating exchange rate system
answer
the forces of demand and supply cause the exchange to settle at the position where the quantity of a currency demanded equals quantity supplied (no gov. intervention)
question
appreciation
answer
increase in value of a currency
question
depreciation
answer
fall in value of a currency
question
speculation
answer
involves buying and selling currencies in order to make a profit from changes exchange rates. Buying and selling is based on expectations of future exchange rate changes
question
fixed exchange rate system
answer
exchange rates that are fixed by the central bank of each country, and are not permitted to change in response to changes in currency supply and demand. include constant intervention by the government or central bank
question
devaluation
answer
if the currency has a high value, then the government changes the fixed rate to a lower value
question
revaluation
answer
if the currency has a low value, then the government changes the fixed rate to a higher value
question
managed exchange rates
answer
in between fixed exchange rates and floating exchange rates (managed float). exchange rates are for the most part free to float to their market levels over long periods of time; however, central banks intervene to stables them over the short term
question
overvalued currency
answer
currency that has a value that is too high relative to its equilibrium free market value (higher than equilibrium)
question
undervalued currency
answer
currency that has a value that is too low relative to it equilibrium free market value (lower than equilibrium)
question
balance of payments
answer
a record (per year) of all transaction between the residents of the country and the residents of all other countries
question
credits
answer
all payments received from other countries
question
debits
answer
all payments made to other countries
question
balance of trade in goods
answer
calculated by subtracting import of goods from export of goods
question
deficits
answer
a balance that has a negative value (debits are larger than credits)
question
balance of trade in services
answer
calculate by subtracting imports of services from exports of services
question
surplus
answer
a balance that has a positive value (credit are larger than debits)
question
income
answer
refers to all inflows of rents, interest, profits from abroad, minus all outflows of rent, interest, profits
question
current transfers
answer
inflows into a country due to transfers from abroad like gifts, remittances, foreign aid, pensions, minus outflow of such transfers to other countries
question
balance of current account
answer
sum of "balance of trade in goods" + "balance of trade in services" + "income" + "current transfers"
question
capital transfers
answer
include inflows minus outflows for such things as debt forgiveness, non-life insurance claims, and investment grants
question
non-produced, non financial assets
answer
transactions that consist mainly of the purchase or use of natural resources that have not been produced
question
balance on capital account
answer
"capital transfers" + "non-produced, non financial assets"
question
direct investment
answer
investment in physical capital by multinational corporations
question
portfolio investment
answer
financial investment (stocks and bonds)
question
reserve assets
answer
foreign currency reserves that the central bank can buy or sell to influence the value of the country's currency
question
balance on financial account
answer
sum of "direct investment" + "portfolio investment" + "reserve assets"
question
errors and omissions
answer
an item creating equality between debits and credits
question
pegging exchange rates
answer
developing countries fixing their currencies to the US dollar
question
invisible balance
answer
The part of the balance of trade that refers to services and other products that do not result in the transfer of physics objects example consulting services
