6.1/6.2
What are the two main components of the balance of payments?
Current account and capital account.
What is the foreign exchange market?
A global marketplace for buying and selling currencies.
How can an increase in interest rates affect the value of a country's currency?
It can lead to an appreciation of the currency
What is a currency depreciation?
A decrease in the value of one currency relative to another.
What is the real interest rate?
The nominal interest rate adjusted for inflation
What does the current account balance include?
Trade in goods and services, net income from abroad, and net current transfers.
the Euro is being bought and sold is an example of what?
the foreign exchange
What is the likely impact on a country's currency if its government implements expansive fiscal policies?
The currency may depreciate due to increased inflationary pressures.
What can cause a currency to depreciate?
Factors such as lower interest rates, political instability, or a large current account deficit.
How do real interest rates affect international capital flows?
Higher real interest rates attract foreign investment, leading to capital inflows.
What term describes a situation where a country's imports exceed its exports?
Trade deficit.
What is the main function of the foreign exchange market?
To facilitate international trade and investment by enabling currency conversion.
How can a trade war affect exchange rates?
It can lead to depreciation of the currencies involved due to decreased trade volumes.
How do central banks intervene in the foreign exchange market
By buying or selling currencies to influence exchange rates.
What happens to capital flows if a country increases its real interest rates?
The country may experience an increase in capital inflows as investors seek higher returns.
What happens to the value of a currency if it appreciates?
The currency's value increases relative to other currencies.
Who are the main participants in the foreign exchange market?
Banks, corporations, governments, central banks, and speculators.
What effect does political instability have on a country's currency?
Political instability usually leads to depreciation of the currency as investors seek safer assets.
What is the impact of a country's inflation rate on its currency value?
How can differences in real interest rates between countries affect exchange rates?
Countries with higher real interest rates may see their currencies appreciate due to increased demand from foreign investors.
What is a floating exchange rate?
An exchange rate determined by the free market through supply and demand.
What is a 'spot transaction' in the foreign exchange market?
A transaction where currencies are exchanged at the current exchange rate for immediate delivery.
How does a country's economic growth rate affect its currency?
Higher economic growth can lead to currency appreciation due to increased investor confidence and higher returns on investments.
How can speculative activities affect the foreign exchange market?
Speculative activities can lead to increased volatility and rapid changes in exchange rates.
What is the carry trade in the context of international finance?
A strategy where investors borrow money in a currency with low-interest rates and invest it in a currency with higher interest rates to profit from the interest rate differential.