Economics Flashcards

Flashcards about exchange rates, balance of payments, gold standard and monetary/fiscal policy.

Flexible Exchange Rate

Exchange rates that are allowed to fluctuate in the open market in response to changes in supply and demand; sometimes called floating exchange rates.

Fixed Exchange Rate

The value of a domestic currency was fixed, or pegged, in units of gold; nations agreed to redeem their currencies for a fixed amount of gold at the request of any holder of that currency.

Managed Exchange Rate

Central banks sometimes seek to influence the exchange rate.

Balance of Payment

A system of accounts that measures transactions of goods, services, income, and financial assets between domestic households, businesses, and governments and residents of the rest of the world during a specific time period.

Par Value

The officially determined value of a currency

What affects the balance of payments?

Inflation rate and political stability

Foreign Exchange Market

A market in which households, firms, and governments buy and sell national currencies.

The Gold Standard

An international monetary system in which nations fix their exchange rates in terms of gold. All currencies are fixed in terms of all others, and any balance of payments deficits or surpluses can be made up by shipments of gold.

Problems with the gold standard

A nation gives up control of its monetary policy; new gold discoveries often cause inflation.

International Monetary Fund (IMF)

A new permanent institution created in 1944 where members agreed to maintain the value of their currencies within 1 percent of declared par value.

When did President Richard Nixon suspend the convertibility of the dollar into gold?

1971

When did the United States go off the Bretton Woods system of fixed exchange rates?

1973

Foreign Exchange Risk

The possibility that changes in the value of a nation's currency will result in variations in the market value of assets.

Hedging

Buying ahead.

Active (discretionary) policymaking

All actions on the part of monetary and fiscal policymakers that are undertaken in response to or in anticipation of some change in the overall economy.

The Phillips curve shows

The relationship between the inflation rate and the unemployment rate is inverse.

What characterizes Stage 1 of the Phillips Curve?

High unemployment but no inflation in Stage 1

How can central banks keep exchange rates fixed?

Central banks can keep exchange rates fixed as long as they have enough foreign exchange reserves to deal with potentially long-lasting changes in the demand for or supply of their nation's currency