Deck 6: Global Money and Finance

Question 1

What is a "balance of payments" equilibrium (deficit, surplus) and how does it relate to foreign reserves?

Answer 1

No Answer.

Question 2

What is meant by the "current account" and the "capital (or financial) account"?

Answer 2

No Answer.

Question 3

Does it make economic sense for a country to have a very high current account surplus?

Answer 3

No Answer.

Question 4

What could be reasons for a country to experience (high) current account deficits (surpluses)?

Question 5

(How) are government budget deficits related to current account deficits?

Question 6

What are the implications of a high capital inflow that leads to a surplus in the capital & financial balance?

Question 7

In what different ways can the exchange rate be defined and what does it mean when the domestic currency appreciates?

Question 8

What is the difference between the nominal and real exchange rate and when do both measures differ in their information about a country's price competitiveness?

Question 9

Which price indices can best be used for calculating the real exchange rate?

Question 10

What is the Real Effective Exchange Rate (REER) and what are its determinants?

Question 11

Identify the 5 correct statements
1. A balance of payments surplus means that a country has an export surplus.
2. The current account records all in- and outflow of foreign exchange.
3. A very high current account surplus often goes together with a capital (sometimes also called: financial) account deficit.
4. For running a current account surplus, a country must spend less than it produces.
5. High government budget deficits are always behind a current account deficit.
6. A high capital inflow can lead to excess spending.
7. A depreciation of the domestic currency can - everything else equal - make our economy less price competitive.
8. The real exchange rate provides better information on a country's price competitiveness than the nominal exchange rate.
9. For calculating the real exchange rate, the Consumer Price Index (CPI) is the best choice.
10. The Real Effective Exchange Rate (REER) is a trade-weighted average of bilateral real exchange rates.

Question 12

What is the difference between flexible and fixed exchange rate regimes?

Question 13

Why and how do economists differentiate between short-term and long-term determinants of exchange rates?

Question 14

How does the Purchasing Power Parity (PPP) theory explain exchange rates developments?

Question 15

What does the PPP theory predict for countries that adopt a fixed exchange rate regime?

Question 16

How does the uncovered interest rate parity (UIRP) theory explain exchange rate movements?

Question 17

What is the likely impact of an expected depreciation of the home currency on domestic interest rates?

Question 18

Does the UIPR always hold and if not, what could be a reason behind it?

Question 19

What does the UIRP imply for countries that have adopted a fixed exchange rate regime?

Question 20

How good are PPP and UIRP in predicting exchange rates?

Question 21

Identify the 5 correct statements
1. Countries with a fixed exchange rate regime will never devalue their currency.
2. In the short-run exchange rates are more likely to be influenced by financial arbitrage than by arbitrage in goods.
3. Purchasing Power Parity (PPP) theory relates to the "law of one price".
4. According to PPP theory, a country that has adopted a fixed exchange rate has full control over its inflation rate.
5. According to the uncovered interest rate parity (UIRP), increases in foreign interest rates tend to lower the value of the domestic currency.
6. According to the uncovered interest rate parity (UIRP), interest rates will always converge across countries under perfect capital mobility.
7. Expected exchange rate changes can lead to a self-fulfilling prophecy.
8. Changes in country risk premia can explain that sometimes the UIRP does not hold.
9. According to the uncovered interest rate parity (UIRP), countries that have adopted a fixed exchange rate can control their interest rate.
10. PPP and UIRP are good predictors for future exchange rates, especially in the short run.

Question 22

What is meant by (capital account) convertibility of a currency?

Question 23

What is the role of the liquidity system of a currency system?

Question 24

What were key reasons for the Gold Standard to collapse?

Question 25

What are the key elements of the Bretton Woods System (BWS)?

Question 26

What were the major reasons for the termination of the BWS?

Question 27

Compare the costs and benefits of flexible and fixed exchange rates.

Question 28

What are the costs and benefits of a currency union?

Question 29

What is an "Optimum Currency Union" (OCA) and - in your opinion - is the European Monetary Union (EMU) and OCA?

Question 30

Identify the 5 correct statements
1. Current account convertibility allows selling and buying foreign exchange for all purposes.
2. The US dollar was an essential part of the liquidity system under the Gold Standard.
3. The Gold Standard features an automatic and symmetric adjustment mechanism.
4. A major reason for the Gold Standard to collapse was the downward rigidity of prices and wages in the presence of the Great Depression.
5. The Bretton Woods System was essentially a flexible exchange rate system.
6. High inflation in the US ultimately led other countries to leave the Bretton Woods System
7. Flexible exchange rates can help countries to deal with external economic shocks.
8. The monetary policy trilemma suggests that flexible exchange rates are not compatible with monetary autonomy and full capital mobility.
9. It is a major cost of a currency union that it cannot deal easily with asymmetric shocks.
10. The European Monetary Union was introduced in 1999 because it clearly met all criteria for an optimal currency union (OCA).

Question 31

What is the global interbank market, aka money market?

Question 32

What are the two major benefits of global finance?

Question 33

What are the risks and costs of global finance?

Question 34

What types of financial crises can be distinguished?

Question 35

How to speculate against a fixed exchange rate?

Question 36

What are the policy options to deal with a devaluation expectation?

Question 37

Explain in brief why and how the EMS crisis of 1992/93 developed.

Question 38

What two different narratives explain the EMU crisis?

Question 39

How can the euro be made more sustainable?

Question 40

Identify the 5 correct statements
1. Portfolio investment comprise both equity and bond investments.
2. The global interbank market is the market where banks lend to corporations worldwide.
3. Global finance contributes to a globally optimal allocation of capital.
4. Sudden stops can constitute a major risk in foreign finance.
5. The term "twin crisis" is used to signify a currency crisis that occurs in two countries at the same time.
6. When expecting a currency devaluation, a (temporary) purchase of foreign currency can be profitable.
7. A country can defend its currency by lowering interest rates.
8. A key factor for the EMS crisis of 1992/93 was that EMS member countries preferred a devaluation of their currencies over high interest rates.
9. It is undisputed among economist that excessive government budget deficits in southern EMU member countries are the cause of the eurozone crisis.
10. Joint risk sharing in the EMU would make the currency union even more unstable.