Exchange Rates and Currency Valuation

What happens when a person from China buys a US government bond?

They are effectively making a loan to the US government.

What reflects the movement of capital in the context of international finance?

The financial account reflects the movement of capital.

What does the current account reflect?

The current account reflects the movement of goods and services.

How are the financial account and current account balanced?

Adjustments in the exchange rate help to ensure they are balanced.

What do you need to purchase items denominated in euros from Italy?

You need to buy euros or pay in US dollars and have them converted.

What can cause one currency to rise while another falls?

Many factors including consumer demand and market conditions.

How does demand for a currency influence its strength?

As demand for a currency rises, it becomes stronger.

What happens to US goods when the dollar appreciates?

US goods become more expensive for foreign buyers.

What is the concept of purchasing power parity?

It's when two currencies can buy the same basket of goods, reflecting their relative values.

What can lead to a depreciation of a currency?

Lowering interest rates can lead to currency depreciation.

What was the Bretton Woods Agreement?

An agreement where currencies were fixed to the US dollar, which was linked to gold.

What happens if the equilibrium exchange rate is not met?

Governments may intervene in the exchange market to stabilize their currency.

What is a floating exchange rate?

Exchange rates determined by market forces rather than fixed to another currency or commodity.

What is the role of the US dollar in the global economy?

It serves as the world's reserve currency and is used in most international transactions.

What can the US Federal Reserve do to stabilize the US dollar during a financial crisis?

They can set up swap lines with other central banks to ensure liquidity.

What is meant by currency 'appreciation'?

When the value of a currency increases in relation to other currencies.

How do global supply chains impact currency exchange?

Each time goods are traded across borders, one currency must be sold and another bought.

What is an equilibrium exchange rate?

The exchange rate at which the supply of and demand for a currency are balanced.

What makes the US dollar a preferred currency for trade?

Its stability, widespread acceptance