International Finance Quiz

National income (Y) that is not spent on consumption (C) or government purchases (G).

In a closed economy, all savings are invested domestically. This means that national savings (S) equals investment (I).

In an open economy, savings can be invested domestically or abroad. This means that national savings (S) equals investment (I) plus or minus the current account balance (CA).

The portion of disposable income that households and individuals choose to save instead of spend.

The difference between government tax revenue (T) and government spending (G).

The balance of trade, including goods, services, income and transfers. A positive balance means a country is lending to foreigners, while a negative balance means a country is borrowing from foreigners.

A situation where a country's current account balance is negative, meaning it is borrowing from foreigners to finance spending.

A situation where a country's current account balance is positive, meaning it is lending money to foreigners.

The balance of payments identity states that the sum of the current account balance and the capital account balance equals the sum of the non-reserve part of the financial account and the balance of payments.

The official settlements balance represents the net change in a country's official foreign exchange reserves, which are held by central banks or other government agencies.

If a country's central bank uses its foreign exchange reserves to maintain a fixed exchange rate, a depletion of reserves could limit its ability to intervene in the market and defend the peg.

For developing countries, holding sufficient foreign exchange reserves is crucial for managing economic risks and maintaining stability during periods of reduced foreign investment.

When a country imports goods, the value of the imports is recorded as a debit in the current account, reflecting an outflow of funds out of the country.

When an individual or company sells a financial asset, the transaction is recorded as a credit in the financial account, representing an inflow of funds into the country.

The argument that import tariffs can reduce a current account deficit might be too simplistic because it doesn't consider the potential impact on domestic production, export competitiveness, and overall economic activity.

The price elasticity of demand measures how much consumer demand changes in response to price changes. The supply elasticity measures how much producers change their output in response to price changes.

Corporations operating in multiple countries, issuing stocks for ownership and bonds for debt financing.

Financial institutions other than banks, like insurance firms, pension funds, hedge funds, and investment banks.

A type of financial asset where the borrower must repay a fixed amount, regardless of economic conditions.

A financial asset that represents ownership in a company, with returns varying depending on the company's performance.

The IMF is the lender of last resort for countries facing financial crises, providing financial assistance with conditions.

The expected value of a gamble is the average of the potential outcomes, weighted by their probabilities. A risk-averse individual prefers a certain outcome over a gamble with the same expected value, even if the gamble has the potential for higher gains.

Portfolio diversification reduces the risk by investing in a variety of assets that are not perfectly correlated. This means that if one asset performs poorly, the others have the potential to offset the losses.

International trade in assets allows countries to diversify their portfolios, reducing risk and potentially increasing average returns. By trading assets with countries that have different economic cycles, countries can smooth out their income streams and achieve more stable returns.

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

A system where the central bank maintains a fixed exchange rate between its currency and another currency or gold.

A system where the exchange rate between currencies is determined by market forces, with minimal intervention from the central bank.

A decrease in the value of one currency relative to another.

An increase in the value of one currency relative to another.

The international monetary system that prevailed from 1870 to 1914, where countries fixed their currencies to gold at a fixed rate.

The international monetary system created after World War II, where countries fixed their currencies to the US dollar, which was pegged to gold. This system lasted until 1971.

The period after the collapse of the Bretton-Woods system, characterized by floating exchange rates and no dominant international monetary system.

A situation where the central bank has limited reserves to defend a fixed exchange rate, making it vulnerable to investor attacks. Investors, anticipating the inability to maintain the peg, sell domestic currency, leading to a devaluation.

A scenario where the central bank has moderate reserves, making the outcome dependent on investor expectations. If investors believe the peg will hold, they hold their currency. If they anticipate a crisis, they sell, leading to a collapse.

The point where neither player can improve their outcome by changing their strategy, given the other player's strategy. In the context of currency pegs, it represents a situation where both investors either hold or sell their currency, leading to a stable peg or a devaluation.

The cost associated with converting one currency to another. Transaction costs can influence the decision to sell or hold currency in a fixed exchange rate regime.

The percentage decrease in the value of a currency compared to another currency. In the context of fixed exchange rate regimes, devaluation occurs when the peg is abandoned, leading to a depreciation of the domestic currency.

The average of potential outcomes, weighted by their probabilities. It represents the expected value of a gamble, calculated by adding the product of each outcome and its probability.

A person who prefers a certain outcome over a gamble with the same expected value. They are averse to risk and prioritize avoiding potential losses over maximizing possible gains.

Trading assets between countries to achieve portfolio diversification. This allows countries to reduce risk and potentially increase average returns.

A situation where countries benefit from trading assets because they can diversify their portfolios and reduce risk.

A portfolio with assets from sectors that are not strongly correlated, meaning their performance tends to move independently. This helps mitigate overall risk.

A portfolio with assets from strongly correlated sectors, meaning their performance tends to move together. This can lead to increased risk.

The interest rate on a loan or investment, calculated as the difference between the payment received and the principal amount divided by the principal.