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ECON 2408 Quiz 9

Terms in this set (25)

what is the interest parity condition
states that the domestic interest rate equals the foreign interest rate minus the expected appreciation of the domestic currency
if a central bank has assets denominated in a foreign currency, what is that called
international reserves
When a central bank purchases or sells domestic currency to purchase or sell foreign assets...
purchase of domestic currency and corresponding sale of foreign assets leads to an equal decline in international reserves and the monetary base (sell domestic to purchase foreign lead to equal rise)
Sterlizied or unsterilized foreign exchange transaction
sterilized - a foreign exchange intervention with an offsetting open market operation that leaves monetary base unchanged
sterilized - has an effect on the monetary base
if a foreign exchange intervention is done with an off setting open market operation, how does it impact your currency
if domestic currency is bought, then it appreciates
if it is sold, it depreciates
current account, capital account, (bold print definitions)
1) the current account shows international transactions that involve currently produced goods and services
2) the capital account is the net receipts from capital transactions (stocks, bonds, loans)
if a current account is increasing or decreasing, how does that affect foreigners claims on our wealth or vice versa
if the current account balance is increasing, that means America is increasing its claims on foreign wealth
what type of exchange rate regime uses an anchor rate currency
fixed exchange rate regime
fixed exchange rate regimes & par values, when the domestic currency is under or over valued...
over valued - central bank must purchase domestic currency but lose international reserves
under valued - sell domestic currency but gain international reserves
what happens if a country runs out of international reserves
it cannot keep the currency from depreciating, and devaluation must occur (reset the par exchange rate at a lower level)
what is a speculative attack
massive sales of a weak currency or purchases in a strong currency that cause a sharp change in the exchange rate
what could happen if there is a speculative attack
balance of payment crises
trilemma
no country can pursue free capital mobility, a fixed exchange rate, or an independent monetary policy at the same time
what is a currency board
1) a solution to the lack of transparency and commitment to the exchange rate
2) when the domestic currency is backed 100% by a foreign currency and in which the note-issuing author establishes a fixed exchange rate and stands ready to exchange domestic currency for foreign currency whenever the public requests it
what is dollarization and signerage
1) dollarization - the adoption of a sound currency as a country's money (like the dollar)
2) seignorage - the losses of revenue that a government receives by issuing money (because a country adopting dollarization no longer has its own currency)
what the velocity is (how to calculate)
total spending (nominal GDP) divided by the quantity of money
what does the fisher quantity theory assume about velocity
velocity is determined by institutions in an economy that affect the way individuals conduct transactions (only affects it slowly over time)
the classical economist believed that changes in the quantity of money led to what
proportional changes in the price level
what the quantity theory of inflation is
nominal income is determined solely by movements in the quantity of money
how the quantity theory of money in the short run or long run
good theory of inflation only for the long run, Fisher believed that velocity was fairly constant in the short run
how can the government finance deficit spending
change in government bonds or change in the monetary base. (raise revenue through taxes, borrow, make more money)
bold print statement about persistent government deficit
financing a persistent deficit by money creation will lead to a sustained inflation
in Keynes liquidity preference theory, how does payment technology affect it
as payment technology advances, the demand for money would likely decline relative to income
portfolio theory what happens to demand for money if interest rates change
higher interest rates decreases the demand for real money
what is the conclusion on how to manage the economy
the instability of money demand has led to a downgrading of the focus on money supply in the conduct of monetary policy
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