Trade Deficits and Sovereign Currencies

These flashcards cover key vocabulary and concepts related to trade deficits and sovereign currencies from the lecture notes.

Exchange Rate

The price of one currency listed in terms of another currency.

Floating Exchange Rate

An exchange rate that is determined in currency markets by the interaction of supply and demand.

Appreciation

When the price of a currency goes up relative to another currency.

Depreciation

When the price of a currency goes down relative to another currency.

Currency Peg

A fixed exchange rate system where a currency's value is tied to another major currency.

Arbitrage

The practice of buying low and selling high to take advantage of price differences.

Purchasing Power Parity (PPP)

The theory that tradeable goods should cost about the same in different currencies.

Nominal Return

The return on an investment before adjustments for inflation.

Capital Flight

The rapid exit of capital from a country, often in response to economic instability.

Sovereign Debt

Debt that is owed by central governments.

Default Risk

The risk of non-payment or partial payment of debt.

Exchange Rate Risk

The risk that the value of a currency may be devalued by the time of repayment.

Trade Account

A component of the current account that records the exports and imports of goods.

Financial and Capital Accounts

Accounts that track trade in financial assets and foreign direct investments.

Market Demand

The total quantity of a good or service that all consumers in a market are willing and able to purchase.

Interest Rate Parity

A theory which suggests that the interest rate differential between two currencies reflects the expected change in exchange rates.

Monetize Debt

The process of printing money to pay off public debt.

Hyperinflation

An extremely high and typically accelerating inflation.

Real Return

The return on an investment after adjustments for inflation.

Interest Parity Condition

An equation that describes the relationship between interest rates and forward or expected exchange rates.