econ quiz

foreign exchange market

where currencies are traded

exchange rates

price at which currencies are traded

appreciation of a currency

when the currency becomes more valuable in terms of other currencies

depreciation of a currency

when the currency becomes less valuable in terms of other currencies

equilibrium exchange rate

the exchange rate at which the quantity of a currency demanded in the forex market is equal to the quantity supplied

relationship between changes in one balance of payment to the other balance of payment

an change in one balance of payment generates an equal and opposite reaction in the balance of payment of the other

real exchange rate

exchange rates adjusted for international differences in APL

nominal exchange rate

exchange rate not adjusted for APL

real exchange rate formula example

real exhange rate= mexican pesos per dollar* Price idex of Us/price index of mexico

purchasing power parity

the nominal exchange rate at which a given basket of goods and services would cost the same in each currency

echange rate regimes

rule governing policy towards the exchange rate

fixed exchange rate

when the gov keeps the exchange rate against some other currency or near a certain target

floating exchange rate

when the gov lets the exchnage rate go where the market takes it

exchange market intervention

gov purchases or sells of currency in the foreign exhcange market constitute

foreign exchange reserve

stocks of foreign current that governements maintain to buy theur own currency on the foreign echange market

foreign exchange controls

liscening systems that limit the rights of indivinduals to buy foreign currency

devaluation

reduction in the value of a currency that is sert under a fixed exchange rate regime (cheaper in forex market, leading to high exports, foreign goods are more expensive leading to lower imports)

revaluation

increase in the value of a currency that is set under a fixed exchange rate regime (makes domestic goods more expensive in terms of foreign currency which reduces exports and makes foreign goods cheaper in domestic currency increasing imports)

when devaluation increases exports and reduces imports

it increases aggregate demand and cna close a reccesionary gap

when revaluation decreases imports and increaes exports

it reduces aggregate demand and can be used to fix an inflationary gap.

balance of payment on the current account

transaction that dont create liabilities

the balance of payments on goods and services

the difference between the value of exports and the value of imports during a given period

trade balance

difference between countries exports and imports of goods alone not including services

transactiosn that involve the sale or purchase of assets and therefore create future liabilities

balanc eof payment on the financial account ( capital account)

current account + finacial account sum

0 or CA=-FA