Exam 19: The World of International Finance

Suppose the United States is experiencing a balance of payments surplus. To prevent the exchange rate from appreciating, the U.S. Treasury must

Holding everything else constant, the U.S. real exchange with Australia will increase if inflation is higher in the United States than in Australia.

What will happen to the exchange rate between the British pound and the U.S. dollar if British prices increase?

The key difference between the real exchange rate and the market exchange rate is that the market exchange rate controls for the level of prices.

Any action that gives rise to a demand for foreign currency is a

Suppose that you are an Israeli citizen and had invested in a one-year U.S. bond that yielded 5 percent. The bond cost $5,000 and paid $5,250 at the end of the year. At the time you bought the bond, the exchange rate was 3.8 shekels/dollar. How many shekels did the bond cost? If the exchange rate fell to 3.5 shekels/dollar over this time period, what would the return on your investment be?

Figure 19.2 -Referring to Figure 19.2, the effect of an increase in Japanese interest rates is represented by a movement from point

Explain what is meant by a devaluation of a currency. Under what circumstances would a country devalue its currency?

If the U.S. government wants to increase the price of the dollar relative to the euro, it could buy euros with dollars in the foreign exchange market.

Recall the Application about how the collapse of the housing boom and the worldwide recession of 2007 led to problems for some countries in the Euro-zone to answer the following question(s). When the euro was launched in 1999, the vision of its founders was to use the monetary union to further unify Europe economically and politically. They envisioned a large economic market, comparable to the United States with integrated goods and financial markets. They believed that by moving to a single currency with agreements on a number of fiscal rules that they could achieve economic stability and growth. -Recall the Application. Greece faced a major financial crisis in 2010 as its budgetary imbalance became quite severe. Since Greece is a member of the Euro-zone, it could no longer ________ as a potential solution to its financial problems.

Figure 19.2 -Referring to Figure 19.2, the effect of a decrease in U.S. prices is represented by a movement from point

If the U.S. real exchange rate increases, U.S. exports will ________ and U.S. imports will ________.

Recall the Application about the causes of the Argentinean financial crisis to answer the following question(s). During the late 1980s, Argentina suffered from hyperinflation. As part of its financial reforms, Argentina pegged its currency to the U.S. dollar, making pesos "convertible" into dollars. The financial and other institutional reforms worked well in the early 1990s, but then problems developed. As the dollar appreciated sharply on world markets after 1995, Argentina began to suffer from a large trade deficit because its currency was pegged to the dollar. Then in 1999, Brazil devalued its currency, putting additional pressure on neighboring Argentina. Eventually, Argentina was forced to default on its international debt in 2002 and freeze bank accounts, and a severe depression ensued. -According to this Application, because Argentina pegged its currency to the U.S. dollar, the appreciation of the dollar caused a large trade deficit in Argentina. This trade deficit meant that

The dollar will appreciate if interest rates fall in the United States.

Foreign exchange market intervention involves the purchase or sale of currencies by governments to influence the market exchange rate.

Figure 19.1 -Referring to Figure 19.1, Mexican goods will become more expensive in the United States if the exchange rate goes from ________ to ________ pesos to the dollar.

If the Japanese government enters the foreign exchange market and purchases yen to maintain a specific exchange rate with the dollar, the dollar will ________ and the yen will ________.

A multilateral real exchange rate is the

If a country's currency depreciates, the country will experience a ________ in exports and a ________ in imports.

Recall the Application about the factors which allow the United States to continue to run large current account trade deficits with the rest of the world to answer the following question(s). The 2006 Economic Report of the President addressed the issue of whether the United States can continue to run large current account deficits. The report stated that the current account deficits would eventually be reduced and highlighted a number of factors that suggested the deficits could continue for a long period of time. -According to this Application, if the United States is running a current account deficit, it must also have