CH 1: Foreign Exchange Markets
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Questions and Answers

What is the primary function of the foreign exchange market?

  • To facilitate international trade by establishing the value of currencies (correct)
  • To record all international transactions
  • To influence interest rates and economic stability
  • To manage capital transactions and investments

    • What factor can lead to the appreciation or depreciation of a currency?

  • Government intervention in the forex market
  • Central banks' direct buying/selling of currencies
  • Interest rates, economic stability, and geopolitical events (correct)
  • Changes in supply and demand of currencies

    • What type of exchange rate system is characterized by government intervention to stabilize the currency's value?

  • Fixed Rate
  • Floating Rate
  • Managed Floating (correct)
  • Free Floating

    • What is the primary purpose of central banks' intervention in the forex market?

    <p>To stabilize or guide the exchange rate towards desired levels</p> Signup and view all the answers

    What component of the Balance of Payments (BoP) records trade in goods and services?

    <p>Current Account</p> Signup and view all the answers

    What is the main difference between the Current Account and the Capital Account?

    <p>The Current Account records trade, while the Capital Account monitors capital transactions</p> Signup and view all the answers

    What does the Balance of Payments (BoP) record?

    <p>All economic transactions between a country and the rest of the world</p> Signup and view all the answers

    What does a BoP surplus indicate?

    <p>A country is exporting more than it imports</p> Signup and view all the answers

    What is the result of a BoP deficit?

    <p>A net outflow of money</p> Signup and view all the answers

    What can be adjusted to correct BoP disequilibria?

    <p>Interest rates, exchange rates, trade policies, and measures to attract foreign investment</p> Signup and view all the answers

    What is affected by a country's BoP and foreign exchange market?

    <p>Its trade competitiveness and attractiveness as an investment destination</p> Signup and view all the answers

    What do policymakers use BoP data for?

    <p>To formulate strategies that stabilize the economy, manage inflation, and promote sustainable growth</p> Signup and view all the answers

    What can changes in a country's forex market or BoP lead to?

    <p>Ripple effects across the global economy, influencing international trade and economic relations</p> Signup and view all the answers

    What is the main purpose of corrections of BoP disequilibria?

    <p>To stabilize the economy, manage inflation, and promote sustainable growth</p> Signup and view all the answers

    What does the BoP data provide insights into?

    <p>A country's economic stability and global interactions</p> Signup and view all the answers

    What determines the exchange rates in the foreign exchange market?

    <p>Supply and demand of currencies</p> Signup and view all the answers

    What is the purpose of central banks' intervention in the foreign exchange market?

    <p>To stabilize the exchange rate</p> Signup and view all the answers

    What type of exchange rate system is characterized by pure market forces without governmental intervention?

    <p>Free Floating System</p> Signup and view all the answers

    What component of the Balance of Payments records capital transactions, excluding financial instruments?

    <p>Capital Account</p> Signup and view all the answers

    What is the primary purpose of the Balance of Payments?

    <p>To provide a comprehensive record of all economic transactions</p> Signup and view all the answers

    What type of exchange rate system is characterized by the government pegging its currency to a major currency?

    <p>Fixed Rate System</p> Signup and view all the answers

    What can affect the supply and demand of currencies in the foreign exchange market?

    <p>All of the above</p> Signup and view all the answers

    What component of the Balance of Payments tracks investments in financial instruments?

    <p>Financial Account</p> Signup and view all the answers

    What can cause changes in the exchange rate?

    <p>All of the above</p> Signup and view all the answers

    A country's BoP surplus indicates that the country has:

    <p>a net inflow of money</p> Signup and view all the answers

    What can policymakers use to formulate strategies that stabilize the economy?

    <p>Data from the BoP</p> Signup and view all the answers

    What can changes in a country's forex market or BoP lead to?

    <p>Ripple effects across the global economy</p> Signup and view all the answers

    What is the main goal of corrections of BoP disequilibria?

    <p>To stabilize the economy and promote sustainable growth</p> Signup and view all the answers

    A country's trade competitiveness and attractiveness as an investment destination are affected by:

    <p>The foreign exchange market and BoP</p> Signup and view all the answers

    What can policymakers adjust to correct BoP disequilibria?

    <p>Interest rates and trade policies</p> Signup and view all the answers

    What is a result of a BoP deficit?

    <p>A net outflow of money</p> Signup and view all the answers

    What do changes in the forex market or BoP affect?

    <p>International trade and economic relations</p> Signup and view all the answers

    What is influenced by a country's trade policies and BoP?

    <p>The country's trade competitiveness and attractiveness as an investment destination</p> Signup and view all the answers

    Which of the following is a characteristic of a free floating exchange rate system?

    <p>Market forces determining exchange rates without intervention</p> Signup and view all the answers

    What is the primary component of the Balance of Payments that records capital transactions, excluding financial instruments?

    <p>Capital Account</p> Signup and view all the answers

    What can be adjusted by central banks to correct BoP disequilibria?

    <p>Interest rates</p> Signup and view all the answers

    What is affected by changes in a country's foreign exchange market and Balance of Payments?

    <p>Trade competitiveness</p> Signup and view all the answers

    What can cause changes in the exchange rate in a managed floating exchange rate system?

    <p>All of the above</p> Signup and view all the answers

    What is the primary purpose of central banks' intervention in the foreign exchange market?

    <p>To stabilize the exchange rate</p> Signup and view all the answers

    What does a country's trade competitiveness and attractiveness as an investment destination depend on?

    <p>Both a and b</p> Signup and view all the answers

    What can policymakers use to formulate strategies that stabilize the economy?

    <p>Balance of Payments data</p> Signup and view all the answers

    What is the main goal of corrections of BoP disequilibria?

    <p>To stabilize the economy</p> Signup and view all the answers

    What is indicated by a country having a BoP surplus?

    <p>The country has more exports than imports</p> Signup and view all the answers

    What is the economic implication of a country's BoP and foreign exchange market?

    <p>Trade competitiveness and attractiveness as an investment destination</p> Signup and view all the answers

    What can policymakers use to formulate strategies that stabilize the economy?

    <p>Data from the foreign exchange market and BoP</p> Signup and view all the answers

    What is the effect of changes in one country's forex market or BoP?

    <p>Ripple effects across the global economy</p> Signup and view all the answers

    What can be adjusted to correct BoP disequilibria?

    <p>Interest rates, exchange rates, trade policies, or foreign investment</p> Signup and view all the answers

    What is the result of a country having a BoP deficit?

    <p>Net outflow of money</p> Signup and view all the answers

    What is affected by a country's trade policies and BoP?

    <p>Trade competitiveness and attractiveness as an investment destination</p> Signup and view all the answers

    What is the main goal of corrections of BoP disequilibria?

    <p>To stabilize the economy</p> Signup and view all the answers

    What can policymakers use to manage inflation?

    <p>Data from the foreign exchange market and BoP</p> Signup and view all the answers

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