17 Questions
What does a rise in the exchange rate E indicate against a representative basket of currencies?
Depreciation
In a fixed exchange rate regime like the Gold Standard, how was each currency's value defined?
In terms of gold
What does a fall in the exchange rate E imply against a representative basket of currencies?
Appreciation
What is the main effect of fixed exchange rate regimes like the Gold Standard on uncertainty related to exchange rate fluctuations?
Eliminate uncertainty
In a floating exchange rate system, what typically defines the value of currencies?
Market forces
What does a deficit in the current account need to be financed by?
Both a and b
How is the balance-sheet position of an economy referred to?
Net international investment position (NIIP)
What is added to the data as a balancing item when asset transactions do not match current transactions?
Statistical discrepancy
How are external deficits typically financed?
Accumulating liabilities with the rest of the world
What must be done if expenditures exceed receipts according to the accounting procedure described?
Sell assets
Which term refers to changes in asset position in the capital and financial account?
Market value measurement
Why is it important to conduct asset revaluations in the context of net foreign assets?
To account for changes in the value of assets at market value
What does a positive net foreign asset position indicate about a country?
It has more claims on the rest of the world than the world has on it
In accounting frameworks, what is the connection between the income statement and the balance sheet?
Income statement represents flows while balance sheet represents stocks
How are asset revaluations in international investments affected by changes in exchange rates?
They occur for instruments denominated in foreign currencies
What does a large external deficit indicate about a country's economy?
It might be a sign of economic trouble
If a firm is accumulating liabilities, what factor determines whether this is a cause for concern?
Whether the liabilities are used for financing purposes
Study Notes
- Exchange rates can rise or fall, leading to depreciation or appreciation against a basket of currencies.
- Different exchange rate regimes include Fixed (Gold Standard, Bretton Woods, EMU) and Floating exchange rates.
- The balance of payments (BOP) must balance, where any deficit in the current account must be financed by a capital inflow.
- The net international investment position (NIIP) or net foreign assets (NFA) indicates whether a country is a net creditor or net debtor.
- Asset revaluations are necessary to account for changes in the value of international investments, especially due to changes in asset prices and exchange rates.
Test your knowledge on a simple model of exchange rate determination involving currencies and quantities. Learn about the concepts of depreciation, appreciation, and exchange rate regimes like the Gold Standard and Bretton Woods.
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