ECO 201 Chapter 26 The Exchange Rate and the Balance of Payments Exam Questions and Answers
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Balance of payments accounts - Answers A country's balance of payment accounts records its
international trading, borrowing, and lending in three accounts: current account, capital and financial
account, and official settlements account.
Capital and financial account - Answers Records foreign investment in the United States minus U.S.
investment abroad.
Crawling peg - Answers An exchange rate that follows a path determined by a decision of the
government or the central bank and is achieved in a similar way to a fixed exchange rate by central bank
intervention in the foreign exchange market.
Creditor nation - Answers A country that during its entire history has invested more in the rest of the
world than other countries have invested in it.
Current account - Answers Records receipts from exports of goods and services sold abroad, payments
for imports of goods and services from abroad, net interest income paid abroad, and net transfers
abroad (such as foreign aid payments).
Debtor nation - Answers A country that during its entire history has borrowed more from the rest of the
world than it has lent to it.
Exchange rate - Answers The price at which one currency exchanges for another currency in the foreign
exchange market.
Fixed exchange rate - Answers An exchange rate that is determined by a decision of the government or
the central bank and is achieved by central bank intervention in the foreign exchange market to block
the unregulated forces of demand and supply.
Flexible exchange rate - Answers An exchange rate that is determined by demand and supply in the
foreign exchange market with no direct intervention by the central bank.
Foreign currency - Answers The money of other countries regardless of whether that money is in the
form of notes, coins, or bank deposits.
Foreign exchange market - Answers The currency of one country is exchanged for the currency of
another.
Government sector balance - Answers Equal to net taxes minus government expenditures on goods and
services.
Interest rate parity - Answers Equal rates of return.
Net borrower - Answers A country that is borrowing more from the rest of the world than it is lending to
the rest of the world.
Solved Correctly
Balance of payments accounts - Answers A country's balance of payment accounts records its
international trading, borrowing, and lending in three accounts: current account, capital and financial
account, and official settlements account.
Capital and financial account - Answers Records foreign investment in the United States minus U.S.
investment abroad.
Crawling peg - Answers An exchange rate that follows a path determined by a decision of the
government or the central bank and is achieved in a similar way to a fixed exchange rate by central bank
intervention in the foreign exchange market.
Creditor nation - Answers A country that during its entire history has invested more in the rest of the
world than other countries have invested in it.
Current account - Answers Records receipts from exports of goods and services sold abroad, payments
for imports of goods and services from abroad, net interest income paid abroad, and net transfers
abroad (such as foreign aid payments).
Debtor nation - Answers A country that during its entire history has borrowed more from the rest of the
world than it has lent to it.
Exchange rate - Answers The price at which one currency exchanges for another currency in the foreign
exchange market.
Fixed exchange rate - Answers An exchange rate that is determined by a decision of the government or
the central bank and is achieved by central bank intervention in the foreign exchange market to block
the unregulated forces of demand and supply.
Flexible exchange rate - Answers An exchange rate that is determined by demand and supply in the
foreign exchange market with no direct intervention by the central bank.
Foreign currency - Answers The money of other countries regardless of whether that money is in the
form of notes, coins, or bank deposits.
Foreign exchange market - Answers The currency of one country is exchanged for the currency of
another.
Government sector balance - Answers Equal to net taxes minus government expenditures on goods and
services.
Interest rate parity - Answers Equal rates of return.
Net borrower - Answers A country that is borrowing more from the rest of the world than it is lending to
the rest of the world.
