International Finance (CAPA) Questions & Answers

The international monetary system - ANSWERSthe set of policies, institutions, practices, regulations, and mechanisms that determine the rate at which one currency is exchanged for another AnswerGold Standard - ANSWERSA monetary system in which paper money and coins are equal to the value of a certain amount of gold AnswerClassical Gold Standard - ANSWERS- All participating currencies directly valued in Gold - Lasted from mid 1800s to 1914 AnswerPostives of gold standard - ANSWERSThe world economy can face deflationary pressures because of restriction of gold circulation.• Countries can decide to abandon this standards if doesn't fit their national political objectives . AnswerBretton Woods System - ANSWERSThe economic order negotiated among allied nations at Bretton Woods, New Hampshire, in 1944, which led to a series of cooperative arrangements involving a commitment to relatively low barriers to international trade and investment. AnswerThe Triffin paradox - ANSWERSThe gold-exchange system was programmed to collapse in the long run because under the gold-exchange system, the reserve-currency country should run balance-of-payments deficits AnswerExchange rate - ANSWERSAn exchange rate is the price of one nation's currency interms of another currency, often termed the referencecurrency. AnswerSpot rate - ANSWERShe price at which currencies are traded forimmediate delivery. Answerforward rate - ANSWERSthe price at which foreign exchange isquoted for delivery at a specified future date. Answerdemand for euros - ANSWERSForeign exchange derives from the demand for Eurozone goods and services and euro-denominated financial assets from the United States and other countries that use the U.S. dollar Answerequilibrium exchange rate - ANSWERSthe exchange rate at which the quantity of a currency demanded in the foreign exchange market is equal to the quantity supplied AnswerRelative inflation rates: - ANSWERSexcess growth in the money supplyrelative to demand will cause inflation. AnswerRelative interest rates - ANSWERSinterest rate differentials will also affectthe equilibrium exchange rate AnswerExchange rate formula - ANSWERS(e1-e0)/e0 AnswerEasier external adjustments - ANSWERSbalance-of-paymentsdisequilibrium without government intervention AnswerTrilema of International Finance - ANSWERSThe trilemma or incompatible trinity says that a country can attain only two of the following three conditions: •A fixed exchange rate, •Free international flows of capital, •An independent monetary policy. Answerdepreciation - ANSWERS(1/e1-(1/e0))/(1/e0) AnswerSmithsonian agreement - ANSWERSagreement (1971) among IMF members to restructure and strengthen the international monetary system created at Bretton Woods Increase the price of gold AnswerEuropean Monetary System (EMS) launched in March1979. Its chief objectives are: - ANSWERSTo establish a "zone of monetary stability" in Europe. •To coordinate exchange rate policies vis-à-vis the non-EMS currencies• To pave the way for the eventual European monetaryunion. AnswerThe European Currency Unit (ECU - ANSWERSa "basket" currencyconstructed as a weighted average of the currencies ofEuropean Union (EU) member countries. AnswerThe Exchange Rate Mechanism (ERM): - ANSWERSis the procedure bywhich EMS member countries collectively manage theirexchange rates. AnswerWhat are the main benefits from adopting a common currency? - ANSWERSreduced transaction costs and the elimination of exchange rate uncertainty allow individuals, companies, and governments to avoid currency losses within EU countries.• Single currency promotes corporate restructuring via mergers and acquisitions, strengthen the international competitive position of European companies. •The common currency and the integration of European financial markets pave the way for a European capital market.• Single currency promotes political cooperation and peace in Europe.