Foreign Exchange Markets Test Review

These flashcards cover key concepts related to foreign exchange markets, including definitions, effects of currency valuation changes, and important principles related to international trade.

What is the definition of the foreign exchange market?

The foreign exchange market is a global marketplace for trading national currencies against one another.

What are the effects of currency appreciation?

When a currency appreciates, it increases in value compared to other currencies, which can lead to lower export demand and higher import demand.

What does it mean when a currency depreciates?

When a currency depreciates, its value decreases relative to other currencies, which can boost export demand and reduce import demand.

What creates demand for foreign currency?

Demand for foreign currency is created by the need for imports, investments, and international transactions.

What happens to the demand and supply of dollars when currencies exchange hands?

When currencies exchange hands in the foreign exchange market, demand and supply for dollars fluctuate based on trading activities and market sentiment.

How does holding more cash affect interest rates?

Holding more cash tends to reduce interest rates, as it increases the money supply available in the economy.

What constitutes the American money supply?

The American money supply includes cash, coins, balances held in checking and savings accounts, and other liquid assets.

What happens when the Federal Reserve sells bonds on the open market?

When the Federal Reserve sells bonds, it decreases the money supply by absorbing cash from the economy.

What is comparative advantage?

Comparative advantage is the ability of a country to produce a good at a lower opportunity cost than another country.

What is absolute advantage?

Absolute advantage is when a country can produce a good more efficiently than another country.

What is the purpose of international trade?

The purpose of international trade is to allow countries to exchange goods and services, leading to increased efficiency and economic growth.

What are the components of the balance of payments account?

The balance of payments account includes the current account, capital account, and official settlements account.

How is the balance of payments account calculated?

The balance of payments account is calculated as the sum of all financial transactions between residents of a country and the rest of the world.

What are positive entries in the balance of payments?

Positive entries include exports, inflows of foreign investment, and remittances.

What are negative entries in the balance of payments?

Negative entries include imports, outflows of investment, and payments made to foreign entities.