国际金融Ch002 International Monetary System

国际金融名词解释国际金融是指涉及多个国家经济体系和货币体系之间的财务和投资活动。

在这个全球化的时代，国际金融变得越来越重要，各国间的经济联系和金融交流不断增加。

在进行国际金融交易和合作时，我们常会面对一些专业术语和名词，下面是一些常见的国际金融名词解释。

1. 外汇市场 (Foreign Exchange Market)外汇市场是进行货币买卖的金融市场，它主要涉及不同国家的货币兑换。

外汇市场的参与者包括商业银行、投资公司、中央银行和个人投资者。

外汇市场的波动受到众多因素的影响，包括宏观经济指标、政治事件、国际贸易等。

2. 外汇汇率 (Foreign Exchange Rate)外汇汇率是指一种货币与另一种货币之间的兑换比例。

汇率的波动对于国际贸易和投资非常重要，它直接影响着不同国家之间的货币转换和国际资本流动。

外汇汇率可以是固定汇率，也可以是浮动汇率，具体取决于国家的货币政策。

3. 国际收支 (Balance of Payments)国际收支是一个国家与其他国家之间经济交易和金融流动的统计记录。

它包括贸易收支、资本流动、国际投资收益等各方面的数据。

国际收支的平衡与否对一个国家的宏观经济稳定和国际信誉有着重要影响。

4. 国际贸易 (International Trade)国际贸易是指不同国家之间的商品和服务的交换。

国际贸易的发展对于全球经济增长和国家繁荣至关重要。

国际贸易可以通过进口和出口来实现，各国之间进行贸易往往依赖于比较优势和竞争力。

5. 跨国公司 (Multinational Corporation)跨国公司是指在多个国家开展业务和经营活动的公司。

跨国公司通常在各个国家设立子公司或分支机构，以便更好地适应不同国家的市场和法律环境。

跨国公司的出现推动了国际经济一体化和全球化进程。

6. 国际金融机构 (International Financial Institutions)国际金融机构是为促进国际金融合作和稳定而设立的国际组织。

国际金融实验报告AbstractThis study uses the international financial experiment to analyze the current financial situation of the International Monetary Fund (IMF). With the development of International Trade, the IMF's financial activities have had an important impact onthe global economy. Through an analysis of the available information, the experiment revealed that the IMF's current activities in international financial activities are relatively successful, but there are also areas that need improvement. In particular, the IMF needs to better regulate its structure to ensure that the World Bank and International Monetary Fund operate according to the principles of the Bretton Woods Agreement.IntroductionThe International Monetary Fund (IMF) is an organization developed after World War II to promote international macroeconomic stability through providing loans and exchangerate regulation. It is an important part of the global economic system and provides loans to countries with balance of payment deficits and assists with regulating exchange rates. The IMF has a key role in ensuring the stability of the world economy andhas been active in monitoring and influencing global economic trends.This experiment will analyze the success of the IMF's current financial activities and discuss areas which need improvement. The analysis will be based on information retrieved from the IMF's website and will explore the activities of the organization and how effectively they are addressing the challenges of global economic stability.Findings and DiscussionThe experiment revealed that the IMF’s activities in international finance are relatively successful. The IMF has been successful in providing quick and efficient loans to countries in need. Furthermore, its regulatory activities have been effective in preventing currency manipulation and creating a level playing field for all parties involved. Another important success of the IMF is that it has been instrumental in creating and sustaining the Bretton Woods Agreement, which sets the rules for international financial activities.However, there are areas where the IMF needs to improve. Firstly, the IMF lacks transparency and its structure needs to be better regulated. Furthermore, its activities are often seen as biased towards the interests of its largest members, and it has been criticized for its lack of accountability and its failure to represent the interests of smaller countries.ConclusionThis experiment revealed that the IMF’s activities in international finance can be generally successful, but there are still areas where it needs to improve. In particular, the IMF needs to better regulate its structure to ensure that the World Bank and International Monetary Fund operate according to the principles of the Bretton Woods Agreement. Furthermore, the IMF needs to be more transparent in its operations and ensure thatit is acting in the interests of all its members. By doing so, the IMF can ensure that global financial stability is achieved and maintained in the long-term.。

1.国际收支（balance of payments，BOP）是一国居民与外国居民在一定时期内各项经济交易的货币价值总和。

BOP: Reflects the total monetary value of all sorts of the economical transactions between residents and non-residents of a given country over a specified time.the balance of payments is the record of the economic and financial flows that take place overa specified time period between residents and non-residents of a given country.2.国民收入是反映一国一定时期内（通常为一年）投入的生产资源所产出的最终产品和服务的市场价值或由此形成的收入的一个数量指标。

国民收入是一个流量概念，可用收入法和支出法来衡量。

Reflects the total productive input or the total value of the final production of a country in course of time. 反映一国在一定时期内所有的生产性的投入或者最终产品的总价值。

一、NI Equality in Closing Economy：1.Expenditure：Ｙ≡Ｃ＋Ｉ＋Ｇ=A2.Income：Ｙ≡Ｃ＋Ｓp+Ｔbecause expenditure equals to income, so: Ｃ＋Ｉ＋Ｇ≡Y ≡Ｃ＋Ｓp+Ｔ二、NI Equality in Opening Economy：Ｙ＝Ｃ＋Ｉ＋Ｇ＋Ｘ－Ｍ3.CA=Ｘ－ＭCA>0, surplus；CA<0, deficit；CA=0, balanced4.CA=Y-ACA>0, surplus；CA<0, deficit；CA=0, balanced5..Ｙ＝Ｃ＋Ｉ＋Ｇ＋Ｘ－Ｍ=Ｃ＋Ｓp+Ｔ；CA=S －ICA>0, surplus, capital outflow ；CA<0, deficit, capital inflow6.Ｙ＝Ｃ＋Ｉ＋Ｇ＋Ｘ－Ｍ=Ｃ＋Ｓp+Ｔ；CA=(Ｓp －Ｉ)+(T －G)7.The Current Account includes all international economic transactions with income orpayment flows occurring within one year, the current period. It consists of the following four subcategories：1.Goods trade (Balance of Trade)：Import and export of goods2.Services trade (Balance of Services)3. Income (Balance of Income)：Income associated with prior investment（Say, a dividendpaid by an Australian subsidiary of a US firm to the parent）；Salaries and wages paid to nonresident workers4.Current transfers: Any one-way transfer of a gift or grant, say, US aid to a developingcountry ；Must be financial; transfers a real (fixed) assets is in another account, the Financial/Capital AccountThe Current Account is typically dominated by the first component which is known as the Balance of Trade (BOT) even though it excludes service trade.8.The Capital/Financial Account of the balance of payments measures all internationaleconomic transactions of real and financial assets. It is divided into two major components: The Capital Account（资本帐户）；The Financial Account（金融帐户）The Capital Account is minor (in magnitude), while the Financial Account is significant.9.The Capital Account includes：Acquisition/disposal of nonproduced/nonfinancial assets ；Transfer of fixed assetsNon-financial assets, for example, a physical asset such as landNon-produced assets, which are needed for production but have not been produced, for example, a mine used for the extraction of diamonds.10.The Financial Account, however, uses a third method. This focuses on the degree ofinvestor control over the assets or operations.The Financial Account consists of three components;Direct Investment –in which the investor exerts some explicit degree of control over the assets（直接投资）Portfolio Investment – in which the investor has no control over the assets（证券投资）Other Investment –consists of various short-term and long-term trade credits, cross-border loans, currency deposits, bank deposits and other A/R and A/P related to cross-border trade （其他投资）11.12.The Official Reserves Account is the total reserves held by official monetary authoritieswithin the country.These reserves are normally composed of the major currencies used in international trade and financial transactions (hard currencies).The significance of official reserves depends generally on whether the country is operating under a fixed exchange rate regime or a floating exchange rate systemUnder a fixed exchange regime, these reserves are important in defending the value of a depreciating currencyChanges in the official reserves represents cash in- or outflows that are capture in the Official Reserves AccountThe Net Errors and Omissions account ensures that the BOP actually balances due to measurement errorsThe errors and omissions in balance of payments accounting arise in large part from the statistical difficulties involved in gathering balance of payments data. Because officials do not have the necessary information to make the double entries they make single entries based on the information available to them. This information often comes from multiple sources that vary in coverage and reliability.13.Reserves include monetary gold, special drawing rights (SDRs), the reserve position in theFund and foreign exchange.14.Fundamentals of BOP Accounting：Credits: real resources exported ------ Positive SignDebits: real resources imported ------ Negative SignTwo empirical rules:All transactions that arouses foreign exchange income should be credited in BOP;All transactions that arouses foreign exchange expenditure should be debited in BOP.Autonomous Transaction：- credit > debit, surplus; - credit < debit, deficit.Accommodating Transaction: - credit > debit, deficit; - credit < debit, surplus.15.X –M = the current account balance16.In theory the BOP must always balance, but statistical errors and misreporting result insubstantial imbalances17.The net errors and omissions account ensures that the BOP actually balances due tomeasurement errors18.Foreign Exchange:Dynamic usage: International exchange transaction in market for shortStatic usage: It means the money of a foreign country and includes:Foreign currency bank balances；Banknotes；Checks and drafts；Currency19. A foreign exchange transaction is an agreement between a buyer and a seller that a fixedamount of one currency will be delivered for some other currency at a specified date20.The spot where handles goods is goods market, while the place where deals ForeignExchange is Foreign Exchange Market.21.Functions of the Foreign Exchange Market：Permit the transfer of purchasing power denominated in one currency into another currency and thereby facilitate transactions；Provide credit for international trade transactions；Minimize exposure to the risks of exchange rate changes22.Speculators and Arbitrageurs：Speculators and arbitrageurs seek to profit from trading in the market itself, not for conducting trade or other forms of businessThey operate in their own interest, without a need or obligation to serve clients or ensure a continuous marketSpeculators seek to profit from their view of exchange rate changesArbitrageurs seek to profit from simultaneous exchange rate differences in different markets23. A foreign exchange rate is the price of one currency expressed in terms of another currencyA foreign exchange quotation (or quote) is a statement of willingness to buy or sell at an announced rate.24. A direct quote is a home currency price of a unit of foreign currency ；An indirect quote is a foreign currency price of a unit of home currencyThe form of the quote depends on what the speaker regards as “home ”25. Measuring a change —depreciation of appreciation of a foreign currency —in the spot rate forquotations expressed in home currency terms:Direct quotations:Example: Suppose the Swiss franc is recently quoted in the spot market at SF1.5625/$ (or, equivalently, $0.6400/SF) but then suddenly appreciates to SF1.2800/$ (or, equivalently, $0.78125/SF). What is the percent appreciation of the SF relative to the dollar?26. Measuring a change —depreciation of appreciation of a foreign currency —in the spot rate forquotations expressed in foreign currency terms:Indirect quotations: All our formulas have been in Indirect terms with the US$ as the home currencyExample (continued): The same rate of appreciation for the Swiss Franc relative to the US Dollar! 27.Spot rate: adopt a Spot transaction ；Forward rate: adopt a forward transaction 28.A Spot transaction in the Interbank market is the purchase of foreign exchange with delivery and payment between banks to take place, normally, on the second following business day. The date of settlement is referred to as the value date. 29.An Outright Forward transaction (usually just called a Forward) requires delivery at a future date of a specified amount of one currency for a specified amount of another currency. The exchange rate is established at the time of the agreement, but payment and delivery are not required until maturity. Forward exchange rates are usually quoted for value dates of one, two, three, six and twelve months. 30. Arbitrage ：seek to profit from simultaneous exchange rate differences in different marketsDirect arbitrage: operate between two foreign marketsIndirect arbitrage: operate in three foreign marketsInterest Arbitrage: seek to profit from simultaneous interest rate differences in different marketsClass Drill 1：1、Assumption:the basic rate between US dollars and the RMB is normally stated: $1=￥8.2500, the basic rate between US dollars and the J ￥ is normally stated: $1=J ￥100.0000Calculation: what ’s the cross rate between RMB and J ￥ ?2、Assumption:%07.22/6400.0$/6400.0$/78125.0$+=-SFSF SF%07.22$/2800.1$/2800.1$/5625.1+=-SF SF SFone day, an American exporter dates a contract with a Germany importer for some goods worthy of DM1,500,000. The counting currency is DM. They will pay off after three months. The rate is $1=DM1.5000 when they signed the treaty.Questions:- What does the rate belong to when they are dating?-Which country wouldn’t suffer the risk of foreign exchange?-How to avoid it?3、Assumption:One day------ first day in May, a speculator anticipates the exchange rate between US dollar and DM is $1=DM1.4580 on first day in Augest, while the three-month exchange rate between US dollar and DM is stated $1=DM1.4500 on first day in Augest.Questions:-What’s the former rate and latter rate respectively?-How can get the profit?4、Assumption:At 10 am. on one business day, the exchange rate between US dollar and DM is stated $1=DM1.4500 in New York, while simultaneously the exchange rate between US dollar and DM is stated $1=DM1.4600 in Frankfurt.Questions: How to arbitrage?5、Assumption:At 10 am. on one business day, the exchange rate between US dollar and DM is stated $1=DM1.5100 in New York, simultaneously the exchange rate between Pound and DM is stated £1 =DM3.0000 in Frankfurt, while the exchange rate between Pound and US dollar is stated £1 =$2.8000 in London.Questions: How to arbitrage?6、Assumption:The one-year periodic interest rate of US dollar in U.S is 12%, while the one-year periodic interest rate of UK pound in U.S is 16%. £1=$2.0000, $1,000,000Questions:-If the exchange rate between US dollar and UK pound is fixed after 3 months, how to invest?-If the exchange rate between US dollar and UK pound is floating after 3 months, how to invest?31.The Typical Dynamics of a Currency Crisis：1.Currency crises begin with foreign investors or speculators deciding—for whatever reason—that at the pegged rate, the country’s currency is overvalued；2.Foreign investors respond by selling their real and financial assets in the country, hence,selling that countries currency；ernments sell their foreign reserves and buy their own currency to defend the peg；Speculators observe the declining foreign reserves and increase their short positions in the country’s financial assets or currency；4.Panic selling ensues；5.The government abandons the peg and devalues the currency—typically by more thanwould have been required at earlier stages of the crisis32.Currency Crises: Effects of Devaluation：1.Real prices for imports rise;2.Output falls:Production (aggregate supply) falls when the economy relies heavily on imported inputs, for example, oil；Consumption (aggregate demand) falls when the country relies heavily on imports for necessities such as food stuffs. (Higher prices for necessities means lower disposable income)3. The net worth of firms and individuals fall4.The banking system is severely weakened (details):Assets (denominated in the home currency) lose value relative to debt (often denominated ina foreign currency in emerging economies)；Credit is either rationed or available only at exorbitant rates；Lack of credit causes output to plummet even further!33.Contagion: It is formally defined as a situation in which a currency crisis in one countryincreases the probability of a currency crisis in another34.Hedge funds are unregulated investment institutions that specialize in short selling, use offinancial derivatives, and leveraged positions (purchasing assets with borrowed funds)：Despite the name, hedge funds speculate!The primary investors are pension funds, trust funds, university endowments, and accredited investorsThese funds tend to remain fairly liquid so that they can fully exploit profit opportunities when they ariseHedge funds have about $1.1 trillion in assets and account for one half of all trades in the US and UK stock markets35.Role of Hedge Funds：The focus of hedge funds on short selling has gained them much notoriety as they often do well when asset prices are falling and other funds are doing badly；Prime Minister Mahathir Mohamad of Indonesia has called hedge funds the “highwaymen of the global economy”；Why? Because of robbing from the poor, less developed and emerging economies where hedge funds do much of their business；In fact, hedge funds have been blamed for not just taking advantage of economic crises but for causing them!Summary：1.Capital mobility is a double-edged sword: Economic openness increases growth andefficiency, but also exposes economies to potential capital outflows that can destabilize the economy2.A currency crisis is a financial crash within the foreign exchange markets. Currency crisesare precipitated by ：Capital flight, that is, a large and rapid withdrawal of funds by foreign investors ；Speculative attack3.Currency crises are caused by：Correlated beliefs among international investors (self-fulfilling prophesies)；Poor economic fundamentals：A fragile and inefficient banking system；Inflationary monetary and fiscal policy4. The central bank responds to a currency crisis by devaluing the country’s currency. Theeffects on the economy are devastating:Real prices for imports rise；Output and consumption fall；The net worth of firms and individuals fall；Unemployment and poverty escalate；The banking system is severely weakened and credit intermediation nearly ceases5. Contagion is caused by：Correlated real shocks, trade linkages, and financial linkages；Correlated beliefs, herding, or wake-up calls6、Currency crises and contagion have become increasingly likely and increasingly severesince the 1990s due, largely, to a far greater level of international economic integration and capital mobility in particular7.Policies prescriptions that reduce the likelihood of a currency crisis and contagion are:Promote the soundness of the financial system—particularly banks；Balance budgets and conduct low inflation monetary policy；Implement short-term capital controls and establish a lender of last resort；Promote long-term—as opposed to hot money—investment;8.Emerging market countries must often choose between two extreme exchange rate regimes,either free-floating or fixed regime where the latter is often through a currency board or dollarization36.Goods market equilibrium in opening economyAssumption:Output is defined by demand totally.BOP refers to import and export of merchandise.One country only produce one product.Nominal variable and real variable.37.Trade balance and national incomeTN =XN – MN =PM* –eP*M ；T=TN /P =M* –(eP*/P) M=M *–qMTrade balance function:T= M*（q，Y*）- qM（q，Y）=T（q，Y*，Y）=T-mY-T: independent trade balance；-mY: dependent trade balance；-m: marginal import tendency38.Domestic absorb and national income：A=C+I+G（Domestic absorb ）C=C+aY -C: independent consumption；-aY: dependent consumption；-a: marginal consumption tendency A=G+I+C=G+I+C+aY=A+aY39.Hoard: H=Y-A H=Y-A=Y-（A+aY）=-A+（1-a）Y=-A+sY -s: marginal saving tendency40.The equilibrium of national income ：H＝T；H=-A+sY=T-mY=T；Y=（A+T）/（s+m）= （A+T）41.Goods market, currency market and foreign exchange market in opening economyAssumption:Output is defined by demand totally.BOP refers to import and export of merchandise.One country only produce one product.1. IS curve :It reflects equilibrium condition in goods market.For private investment: I ＝I （i ）＝I0－biFor domestic absorb: A ＝A （G ，i ，Y ）＝A ＋aY －biIn what condition, goods market would be balance?Y=A ＋T =A+aY-bi+T0-mY ； Y=a （A-bi+T0） ； a=1/（1＋m-a ）Economic analysis ：The slope is minus ；In what condition, the curve would move towards right? If I descends, in which condition (open economy & close economy) national income would increase more?2. LM curve ：It reflects equilibrium condition in currency market.Ms=Md; Ms/P=LD （i ，Y ）=kY-hi k>0，h>0） Y=1/k(hi+M0/P)3. CA curve: It reflects equilibrium condition in foreign exchange market .T=T-mY=0 Y=T/mThe equilibrium is irrelevant to i.For CA curve, Left------ surplus, Right------ deficitWhen it satisfies the Marshall- Lerner condition,q ,the curve moves towards right; q ,the curve moves towards left.42. Open economy equilibrium in fixed exchange system (equilibrium condition):1、如左图：In closing economy: equilibrium in both markets (goods market & currency market) A point2、如右图：In opening economy:equilibrium in three markets(goods market, currency market and foreign exchange market) A ’ point3、如左图：Income mechanism (short term)：Deficit in BOP(CA)：Decrease in foreign exchange ； reserve ； Decline in currency supply ； Descend in national income ；Dip in import expenditure ； Improve in CAi 0i 04、如右图：Currency-price mechanism (long term)：Deficit in BOP(CA)： Decrease in foreign exchange ； reserve ； Decline in currency supply ； Descend in Price level ；Devaluation in real exchange ； Improve in CA 43. Open economy equilibrium in floating exchange system ：1.price-specieflow mechanism ：Deficit in BOP(CA)：Decrease in foreign exchange ； Devaluation in nominal exchange ； Devaluation in real exchange ； Improve in CA44. 总结：Goods market equilibrium reflects only one market, while goods market, currency market and foreign exchange market balance reflect three markets, which is called general equilibrium model.Every curve in each market could be reflected by two variables ------Y&i.We should analyze the daily economic condition by those two models, especially in national finance.45. Monetary approach in BOP ：1.Assumption:Price is flexible in short term ；Real demand of currency is determined by Y&I;Goods' price and interest rate is defined by wordwide market.’i i L 0 0i i LM0’Y i i 0LMY 0 Y 0 ’ IS ’2. Equilibrium in currency markrt: Ms=Md; Ms=m （D+R ）; Md=pf （Y,i ）3. BP curve :For CA: CA=CA （q ，Y ）For KA: K=k （i ，i*）=k （i ）For BP: BP=CA+K=CA （q ，Y ）+K （i ）=0Economic analysis :Vertical axis ： -left------surplus ； -right------deficitHorizontal axis ： -above------ surplus ； -below------deficit46. Open economy equilibrium in fixed exchange system ：International funds move perfectly ：Deficit in BOP ： Decrease in foreign exchange ； reserve ； Decline in currency supply ； Ascend interest rate ； Capital inflow ； Improve in BOP47. Open economy equilibrium in floating exchange system ：YY i BP ’International funds move perfectly ： Deficit in BOP ； Own currency devaluation ； Increase in export ； Ascend interest rate ； Capital inflow ； Improve in BOP48. Mundell-Fleming model ：Assumption:Supply curve is horizontal.；PPP establish no longer.；Anticipated exchange is static.；International funds move perfectly.1. Fiscal policy & monetary policy in fixed exchange system ：Monetary policy (invalidation)； Fiscal policy (valid)2. Fiscal policy & monetary policy in floating exchange system ：Monetary policy (valid)； Fiscal policy (invalidation)49. Crugelm Paradox ：Y iBPYi=ia) Mudel-Fleme Model1.Assumption ：Supply curve is horizon ；PPP doesn't work ；FE rates is predicated be static ；Capital flows across the world without obstacles2. Fiscal policy and monetary policy in fixed FE system ：Fiscal policy (doesn ’t work)；Monetary policy (work )3. Fiscal policy and monetary policy in floating FE system: Fiscal policy (work);Monetary policy (doesn ’t work )4.结论:50. International Parity Conditions:1,Some fundamental questions managers of MNEs, international portfolio investors, importers, exporters and government officials must deal with every day are:What are the determinants of exchange rates?Are changes in exchange rates predictable?2,International parity conditions are most important to decision makers when they do not hold3,The decision to borrow in a currency, locate a plant in a country, and other financial decisions may boil down to a judgment as whether a parity condition is violated4,The economic theories that link exchange rates, prices, and interest rates together are called international parity conditionsFixed exchange systemFunds move perfectly Monetary policy is valid Static FE systemCapital is fluid wholly Independentmonetary currency5,These international parity conditions form the core of the financial theory that is unique to international finance6, Under conditions of free floating exchange rates, the expected rate of change in the spot rate, differential interest and inflation rates, and the forward rate are all interrelated7,International parity conditions are most easily developed under the assumption of perfect capital markets: No transaction costs; No taxes; Certainty8, Driver of the parity conditions: profit-maximizing “agents ” will act to eliminate all arbitrage opportunities9.There are three principal parity conditions:Purchasing power parity;Interest rate parity;International Fisher effect51. International Currency System:1.Gold Standard System: Mint parityGold Export Points ; Gold Import Points2. Paper Money SystemAssumption:1,Financial markets are perfect with no controls, taxes, transaction costs, etc2,Goods markets are perfect with international shipment of goods able to take place freely, instantaneously and without cost3,There is a single consumption good common to everyone4,The same commodities appear in the same proportions in each country ’s consumption basket.52. If the identical product or service can be sold in two different markets —and no restrictions orcosts exist on the sale or transportation of moving the product between markets —the products price should be the same in both markets. This is called the Law of One PriceA primary principle of competitive markets is that prices will equalize across markets if frictions (transportation costs) do not exist.53. If the Law of One Price is imposed between baskets of consumer goods in two countries,we have a condition known as Purchasing Power Parity (PPP) Where the basket or index price in US dollars is P$, the spot exchange rate is S (in ¥/$) and the basket or index price in yen is P¥By comparing the prices of identical baskets of products denominated in different currencies, we could determine the PPP exchange rate that should exist if markets were efficient: This is the absolute version of the PPP theoryIf the assumptions of the absolute version of the PPP theory are relaxed a bit more, we observe what is termed Relative Purchasing Power Parity (RPPP)RPPP holds that PPP is not particularly helpful in determining what the spot rate is today, but that the relative change in prices between two countries over a period of time determines ¥$tt t P e P =⨯the change in the exchange rate over that periodIf the spot exchange rate between two countries starts in equilibrium, any change in the differential rate of inflation between them tends to be offset over the long run by an equal but opposite change in the spot exchange rateWe can represent RPPP mathematically:54., and the spotexchange rate is S (in ¥/$)We can make the following approximate representation of RPPP:55. Two general conclusions can be made from these tests:1,PPP holds up well over the very long run but poorly for shorter time periods2,The theory holds better for countries with relatively high rates of inflation and underdeveloped capital markets56. The Use of PPP in Management Decisions:For example, when PPP holds, a firm might make itsinvestment and marketing decisions without great concern for exchange rate fluctuations/riskWhen PPP is violated and all other things are equal, managers prefer:To locate production in countries with undervalued currenciesTo earn revenues —market products —in markets with overvalued currencies57. Interest Rates, Spot Rates & Forward Rates:1.The theory of Interest Rate Parity (IRP) provides the linkage between the foreign exchange markets and the money markets in different countries :The difference in the national interest rates for securities of similar risk and maturity should move in the opposite direction relative to the forward rate premium for the foreign currency (except for transaction costs)2.IRP links: the current spot rate, the forward rate, and the interest rates in each country3. IRP differs from the International Fisher Effect, in that IRP relies on a pre-negotiated forward rate to reconvert currency at the future date —not an expected future spot rate —and avoids currency risk4.Unlike RPPP and the International Fisher Effect, IRP holds even if we relax the assumption of no uncertainty!Interest Rate Parity (IRP) states that an investor should be indifferent between:1. Investing in her home market for some period and2. Converting to a foreign currency at the spot rate, investing in the foreign market, and entering into a forward contract to reconvert from the foreign currency back into her homecurrency Or, more concisely (but still exactly), interest rate parity is:where F is the forward rate (SF/$) $/$/$1)1(1SF SFSF F i S i ⨯+⨯=+Or, in approximate form, interest rate parity is:58.be calculated for any specific maturity by adjusting the current spotratio of interest rates of the same maturity for the two subject currencies: Similarly we can use interest rate parity(in approximate form) to calculate premium, that is, the percentage and forwardstated in annual percentage termspremium and the yield curves in the home and foreign markets: 59.1,The spot and forward exchange rates are not, however, constantly in the state of equilibrium described by interest rate parity 2,For fleeting moments, the market is not in equilibrium, and the potential for (riskless) arbitrage profit exists 3.The arbitrageur will exploit the imbalance by investing in whichever currency offers the higher return on a covered basis This is known as Covered Interest Arbitrage (CIA) 60.Uncovered Interest Arbitrage: A deviation from covered interest arbitrage is Uncovered Interest Arbitrage (UIA) Essentially, investors believe that there is a violation of the International Fisher Effect not IRP In practice, investors are betting that the future spot rate will not be much different from the current spot rate —despite an interest rate differential In this case, investors borrow in countries and currencies exhibiting relatively low interest rates and convert the proceed into currencies that offer much higher interest rates The transaction is “uncovered” because the investor does not sell the higher yielding currency proceeds forward but plans to sell spot later on The investor chooses to remain uncovered and accept the currency risk of exchanging the higher yielding currency into the lower yielding currency at the end of the period 61.Predicting the Future Spot Rate: Some forecasters believe that forward exchange rates are unbiased predictors of future spot exchange rates. Intuitively this means that the distribution of possible actual spot rates in the future is centered on the forward rate. Unbiased prediction simply means that the forward rate will, on average, overestimate and underestimate the actual future spot rate in equal frequency and degree Forward rates can be valuable in multinational capital budgeting decisions 62. 总结：1、Parity conditions have traditionally been used by economists to help explain the long-run trends in exchange rates。

《国际贸易与金融(2)》课程教学大纲一、课程总述二、教学时数分配三、单元教学目的、教学重难点和内容设置Chapter11 The Balance of Payments【教学目的】After completing this chapter, the student should be able to:∙Define the balance of payments.∙Identify the credit and debit transactions on the balance of payments.∙Discuss the current account and the capital account of the balance of payments.∙Identify trends on the U.S. balance of payments.∙Describe the balance of international indebtedness.【重点难点】the U.S. balance of payments and the U.S. balance of international indebtedness. Of particular importance is the United States as a debtor nation and the views concerning the effects of U.S. indebtedness.【教学内容】. Double-entry accounting. Balance-of-payments structure. International payments process. U.S balance of payments. What does a current account deficit. Do current account deficits cost. Balance of international indebtednessCHAPTER 12 FOREIGN EXCHANGE【教学目的】After completing this chapter, the student should be able to:∙Discuss the operation of the foreign exchange market.∙Understand the foreign exchange quotations of The Wall Street Journal.∙Explain how traders benefit from the forward exchange market.∙Describe how exchange rates are determined in a free market.∙Discuss the nature and operation of currency arbitrage.∙Explain the strategy of exchange-rate speculation.【重点难点】the nature and operation of the foreign exchange market.【教学内容】. Foreign-exchange market. Types of foreign-exchange transaction. interbank trading. Traders run currency markets. Reading foreign-exchange quotations. Forward and futures markets. Foreign-currency options. Exchange –rate determination. Indexes of the foreign-exchange value of the dollar: nominal and real exchange rate. Arbitrage. The forward market. Interest arbitrage. Foreign-exchange market speculation. Speculation and exchange-market stability..CHAPTER 13 EXCHANGE-RATE DETERMINATION【教学目的】After completing this chapter, students should be able to:∙Identify the market fundamentals which underlie movements in exchange rates.∙Explain how market expectations affect currency values.∙Discuss how market fundamentals and market expectations interact to influence exchange rates. ∙Explain how the volatility of exchange rates is influenced by the phenomenon of overshooting.【重点难点】explain the factors that underlie currency movements.【教学内容】.xchange-rate determination in a free market. Real income and exchange rates. Real interest rates and exchange rates. Inflation rates, purchasing power parity and exchange rates. Other market fundamentals and their effects on exchange rates. Market expectations and exchange rates. Interaction of exchange-rate determinantsThe Federal Reserve and the monetary. Financial assets as determinants of exchange rates. Exchange-rate overshooting. Forecasting foreign-exchange rateCHAPTER 14 BALANCE-OF-PAYMENTS ADJUSTMENTSUNDER FIXEDEXCHANGE RATES【教学目的】After completing the chapter, students should be able to:∙Identify the adverse effects that persistent balance-of-payments disequilibriums have on an economy.∙Discuss the automatic adjustment mechanisms in the balance of payments that occur under a system of fixed exchange rates.∙Describe the disadvantages of the automatic adjustments of the balance of payments.∙Explain why the monetary approach to the balance of payments is an alternative to traditional adjustment theories.【重点难点】balance-of-payments adjustments under fixed exchange rates【教学内容】Price adjustments. Interest-rate adjustments. Capital flows and the balance of payments. Income adjustments. Income determination in a closed economy. Monetary adjustmentsCHAPTER 15 EXCHANGE-RATE JUSTMENTS ANDTHE BALANCE OF PAYMENTS【教学目的】After completing the chapter, students should be able to:∙Discuss how currency depreciation (devaluation) affects a nation’s trade position through its impact on relative prices, incomes, and purchasing power of money balances.∙Explain how the J-curve effect relates to the time path of currency depreciation.∙Discuss the significance of currency pass through for exchange rate changes.∙Describe the absorption approach to currency devaluation.【重点难点】·currency dep reciation (devaluation) can affect a nation’s trade position through its impact on relative prices, incomes, and purchasing power of money balances.【教学内容】. Effects of exchange-rate changes on costs and price. Cost-cutting strategies of manufactures in response to currency appreciation. Requirements for a successful depreciation (devaluation). The elasticity approach to exchange-rate adjustment. The dollar and U.S. manufacturing. The absorption approach to exchange-rate adjustment. The monetary approach to exchange-rate adjustmentCHAPTER 16 EXCHANGE-RATE SYSTEMS【教学目的】After completing the chapter, students should be able to:∙Identify the criteria which underlie a nation’s preference for fixed exchange rates or floating exchange rates.∙Explain the importance of the special drawing right for the international monetary system.∙Discuss the advantages and disadvantages of a fixed exchange rate system and a floating exchange rate system.∙Describe the operation of a system of managed-floating exchange rates.【重点难点】·a survey of exchange-rate systems and identifies the economic factors that influence the choice of alternative exchange-rate systems.【教学内容】. Exchange-rate practices. Fixed exchange-rate system. Stabilizing currencies of developing countries: currencies board versus dollarization. Floating exchange rates. Adjustable pegged rates. Managed floating rates. The crawling peg. Exchange controlsCHAPTER 17 MACROECONOMIC POLICY IN AN OPEN ECONOMY【教学目的】After completing the chapter, students should be able to:∙Identify the tools of international economic policy.∙Discuss how nations use expenditure-changing policies and expenditure-switching policies to achieve overall balance.∙Explain the significance of policy agreement and policy disagreement.∙Describe the importance of international economic policy coordination for the world’s financial system.∙Identify the problems confronting international economic policy coordination.【重点难点】a survey of macroeconomic policy in an open economy.【教学内容】. Economic policy in an open economy. Economic objectives of nations. Policy instruments. Exchange-rate policies and overall balance. Monetary policy and fiscal policy: effects on internal balance. Monetary and fiscal policies: effects on external balance. Monetary policy and fiscal policy: policy agreement and policy conflict. Inflation with unemployment. International economic-policy coordinationCHAPTER 18 INTERNATIONAL BANKING:RESERVES, DEBT, AND RISK【教学目的】After completing the chapter, students should be able to:∙Explain how international reserves allow nations to cope with balance-of-payments disequilibria. ∙Identify the determinants of the demand for international reserves.∙Identify the major sources of international reserves.∙Describe the risks that bankers face when making loans to international borrowers.∙Discuss the options available to nations which experience debt-servicing difficulties.∙Discuss the role of the International Monetary Fund in the world financial system.【重点难点】a survey of the international banking system.【教学内容】·Nature of international reserves. Demand for international reserves. The international monetary fund. Supply of international reserves. Foreign currencies. Gold. Gold exchange standard. Special drawing rightes. Facilities for borrowing reserves. International lending risk. The problem of international debt. Reducing bank exposure to developing-nation debt. Debt reduction and debt forgiveness. Financial crisis and the international monetary fund. The Eurocurrency market。

C h002-I n t e r n a t i o n a l-M o n e t a r y-S y s t e mEun & Resnick 4eCHAPTER 2 International Monetary SystemEvolution of the International Monetary SystemBimetallism: Before 1875Classical Gold Standard: 1875–1914Interwar Period: 1915–1944Bretton Woods System: 1945–1972The Flexible Exchange Rate Regime: 1973–PresentThe Current Exchange Rate ArrangementsEuropean Monetary SystemThe Euro and the European Monetary UnionA Brief History of the EuroWhat Are the Benefits of Monetary Union?Costs of Monetary UnionProspects of the Euro: Some CriticalQuestionsThe Mexican Peso CrisisThe Asian Currency CrisisOrigins of the Asian Currency CrisisLessons from the Asian Currency CrisisThe Argentine Peso CrisisFixed versus Flexible Exchange Rate RegimesSummaryMINI CASE: Will the U.K. Join the Euro Club?Evolution of the International Monetary System1)The international monetary system can be defined as the institutional frameworkwithin which:a)international payments are madeb)movement of capital is accommodatedc)exchange rates among currencies are determinedd)all of the aboveAnswer: d page 25.2)The international monetary system went through several distinct stages of evolution.These stages are summarized, in alphabetic order, as follows(i)- Bimetallism(ii)- Bretton Woods system(iii)- Classical gold standard(iv)- Flexible exchange rate regime(v)- Interwar periodThe chronological order that they actually occurred is:a) (iii), (i), (iv), (ii), and (v)b) (i), (iii), (v), (ii), and (iv)c) (vi), (i), (iii), (ii), and (v)d) (v), (ii), (i), (iii), and (iv)Answer: bBimetallism: Before 18753)Gresham’s Law states that ( )a)Bad money drives good money out of circulation.b)Good money drives bad money out of circulationc)If a country bases its currency on both gold and silver, at an official exchange rate,it will be the more valuable of the two metals that circulate.d)None of the above.Answer: a4)In the 1850s the French franc was valued by both gold and silver, under the officialFrench ratio which equated a gold franc to a silver franc 15½ times as heavy. At the same time, the gold from newly discovered mines in California poured into themarket, depressing the value of gold. As a result,a)The franc effectively became a silver currency.b)The franc effectively became a gold currency.c)Silver became overvalued under the French official ratiod)Answers a) and c) are correctAnswer: b5)Suppose that the pound is pegged to gold at £20 per ounce and the dollar is pegged togold at $35 per ounce. This implies an exchange rate of $1.75 per pound. If thecurrent market exchange rate is $1.80 per pound, how would you take advantage of this situation? Hint: assume that you have $350 available for investment.a)Start with $350. Buy 10 ounces of gold with dollars at $35 per ounce. Convert thegold to £200 at £20 per ounce. Exchange the £200 for dollars at the current rate of $1.80 per pound to get $360.b)Start with $350. Exchange the dollars for pounds at the current rate of $1.80 perpound. Buy gold with pounds at £20 per ounce. Convert the gold to dollars at $35 per ounce.c)a) and b) both workd)none of the aboveAnswer: a6)Prior to the 1870s, both gold and silver were used as international means of paymentand the exchange rates among currencies were determined by either their gold orsilver contents. Suppose that the dollar was pegged to gold at $30 per ounce, theFrench franc is pegged to gold at 90 francs per ounce and to silver at 6 francs perounce of silver, and the German mark pegged to silver at 1 mark per ounce of silver.What would the exchange rate between the U.S. dollar and German mark be under this system?a) 1 German mark = $2b) 1 German mark = $0.50c) 1 German mark = $45d) 1 German mark = $1Answer: a page 26.Rationale: Start with $30, buy one ounce of gold. Sell that ounce of gold for FF 90. Sell the FF90 for 15 ounces of silver. Buy 15 German marks. Thus, $30 = DM15.Classical Gold Standard: 1875-19147)An “international” gold standard can be said to exist whena)gold alone is assured of unrestricted coinageb)there is two-way convertibility between gold and national currencies at stableratiosc)gold may be freely exported or importedd)all of the aboveAnswer: d - p. 288)Suppose that the British pound is pegged to gold at £6 per ounce, whereas one ounceof gold is worth €12. Under the gold s tandard, any misalignment of the exchange rate will be automatically corrected by cross border flows of gold. Calculate the possible savings for buying €1,000, if the British pound becomes undervalued and trades for €1.80. (Assume zero shipping costs).(Hint: Gold is first purchased using the devalued British pound from the Bank ofEngland, then shipped to France and sold for €1,000 to the Bank of France).a)£55.56b)£65.56c)£75.56d)£85.56Answer: a - p. 28Rationale: Since an ounce of gold should be worth the same north or south of the English Channel, it should be €12 = £6. So our exchange rate implied by gold prices is €2 = £1, therefore buying €1,000 should cost £500:€1,000×£1/€2 = £500.00If the pound is undervalued at €1.80, we find that €1,000 costs £555.56:€1,000×£1/€1.80 = £555.56Savings in buying €1,000 by using gold and not posted exchange rates:£555.56 - £500.00 = £55.569)Under a gold standard, if Britain exported more to France than France exported toGreat Britain,a)Such international imbalances of payment will be corrected automatically.b)This type of imbalance will not be able to persist indefinitelyc)Net export from Britain will be accompanied by a net flow of gold in the oppositedirection.d)All of the aboveAnswer: d page 27.10)Suppose that Britain pegs the pound to gold at six pounds per ounce, whereas theexchange rate between pounds and U.S. dollars is $5 = £1. What should an ounce of gold be worth in U.S. dollars?a)$29.40b)$30.00c)$0.83d)$1.20Answer: b)Rationale: 1oz. Au = £6 and £1 = $5 so £6 = $30 = 1oz. Au11)Under the gold standard, international imbalances of payment will be correctedautomatically under thea)Gresham Exchange Rate regimeb)European Monetary Systemc)Price-specie-flow mechanismd)Bretton Woods AccordAnswer: cInterwar Period12)During the period between World War I and World War IIa)The major European powers and the U.S. returned to the gold standard and fixedexchange rates.b)While most countries abandoned the gold standard during World War I,international trade and investment flourished during the interwar period under acoherent international monetary system.c)The U.S. dollar emerged as the dominant world currency, gradually replacing theBritish pound for the role.d)None of the above.Answer: c 29.13)During the period between World War I and World War II, many central banksfollowed a policy of sterilization of golda)This restricted the rate of growth in the supply of goldb)By matching inflows and outflows of gold respectively with reductions andincreases in domestic money and credit.c)By matching inflows and outflows of gold respectively with increases andreductions in domestic money and credit.d)None of the above.Answer: b page 29.14)At the outbreak of World War Ia)Major countries such as Great Britain, France, Germany and Russia suspendedredemption of banknotes in goldb)Major countries such as Great Britain, France, Germany and Russia imposedembargoes on the export of goldc)The classical gold standard was abandonedd)All of the above.Answer: b page 28Bretton Woods System: 1945-197215)Under the Bretton Woods systema)there was an explicit set of rules about the conduct of international monetarypoliciesb)each country was responsible for maintaining its exchange rate within 1 percent ofthe adopted par value by buying or selling foreign exchanges as necessaryc)the U.S. dollar was the only currency that was fully convertible to goldd)all of the aboveAnswer: d.16)Under the Bretton Woods system:a)Each country established a par value for its currency in relation to the dollar.b)The U.S. dollar was pegged to gold at $35 per ounce.c)each country was responsible for maintaining its exchange rate within 1 percent ofthe adopted par value by buying or selling foreign exchanges as necessaryd)all of the aboveAnswer: d.17)Since the SDR is a “portfolio” of currenciesa)Its value tends to be more stable than the value of any of the individual currenciesincluded in the SDRb)Its value tends to be less stable than the value of any of the individual currenciesincluded in the SDRc)Its value tends to be as stable as the average of the individual currencies includedin the SDRd)None of the aboveAnswer: a)Rationale: while this is in the book on page 31, many students tend to miss this one. Any portfolio is less volatile than the average volatility of the individual securities, as long as at least two securities are not perfectly positively correlated. This is certainly the case with currencies.18)Special Drawing Rights (SDR) are:a)an artificial international reserve allotted to the members of the InternationalMonetary Fund (IMF), who can then use it for transactions among themselves orwith the IMFb) a “portfolio” of currencies, and its value tends to be more stable than thecurrencies that it is comprised ofc)used in addition to gold and foreign exchanges, to make international paymentsd)all of the aboveAnswer: d - p. 32The Flexible Exchange Rate System19)Gold was officially abandoned as an international reserve asset:a)In the January 1976 Jamaica Agreementb)In the 1971 Smithsonian Agreementc)In the 1944 Bretton Woods Agreementd)None of the aboveAnswer: a20)Following the demise of the Bretton Woods system, the IMFa)Created a new role for itself, providing loans to countries facing balance-of-payments and exchange rate difficulties.b)Ceased to exists, since the era of fixed exchange rates had ended.c)Became the sole agent responsible for maintaining fixed exchange rates.d)Became the central bank of the United NationsAnswer a page 32.21)Under a purely flexible exchange rate systema)Supply and demand set the exchange ratesb)Governments can set the exchange rate by buying or selling reservesc)Governments can set exchange rates with fiscal policyd)B) and c) are correct.Answer aRationale: under a purely flexible system, the government doesn’t interfere.Current Exchange Rate Arrangements22)A currency board arrangement is:a)When the currency of another country circulates as the sole legal tenderb)When the country belongs to a monetary or currency union in which the samelegal tender is shared by the members of the union.c) A monetary regime based on an explicit legislative commitment to exchangedomestic currency for a specified foreign currency at a fixed exchange rate,combined with restrictions on the issuing authority to ensure the fulfillment of its legal obligation.d)Where the country pegs its currency at a fixed rate to a major currency where theexchange rate fluctuates within a narrow margin of less than one percent. Answer: c page 34.23)Ecuador does not have its own national currency, circulating the U.S. dollar instead.About how many countries do not have their own national currency?a)10b)20c)30d)40Answer: d page 35.24)With regard to the current exchange rate arrangement between the U.S. and the U.K.,it is best characterized asa)Independent floating (market determined)b)Managed floatc)Currency boardd)Pegged exchange rate within a horizontal band.Answer: a page 34-35.25)With regard to the current exchange rate arrangement between Italy and Germany., itis best characterized asa)Independent floating (market determined)b)Managed floatc)An exchange arrangement with no separate legal tender.d)Pegged exchange rate within a horizontal band.Answer: c page 34.European Monetary System26)To pave the way for the European Monetary Union, the member countries of theEuropean Monetary System agreed to achieve a convergence of their economies.Which of the following is NOT a condition of convergence:a)Keep the ratio of government budget deficits to GDP below 3 percentb)Keep gross public debts below 60 percent of GDPc)Achieve a high degree of price stabilityd)Maintain its currency at a fixed exchange rate to the ERMAnswer d) page 38.For d) to be true, it should read “Maintain its currency within the prescribed exchange rate ranges of the ERM.”27)The European Monetary System (EMS) has the following chief objectives:a)to establish a “zone of monetary stability” in Europeb)to coordinate exchange rate policies vis-à-vis the non-EMS currenciesc)to pave the way for the eventual European monetary uniond)all of the aboveAnswer: d - p. 3828)The Exchange Rate Mechanism (ERM) isa)the procedure by which ERM member countries collectively manage theirexchange ratesb)based on a “parity-grid” system, which is a system of par values among ERMcountriesc) a and bd)none of the aboveAnswer: c - p. 3829)The Maastricht Treatya)Irrevocably fixed exchange rates among the member currenciesb)Commits the members of the European Union to political union as well asmonetary union.c)Was signed and subsequently ratified by the 12 member states.d)All of the above.Answer d) page 38.30)The single European currency, the euro, was adopted by 11 member nations onJanuary 1 of what year?a)1984b)1991c)1999d)2001Answer c) page 39.Euro and the European Monetary Union31)Benefits from adopting a common European currency includea)Reduced transaction costsb)Elimination of exchange rate riskc)Increased price transparency will promote Europe-wide competitiond)All of the aboveAnswer d) page 41-42.32)Monetary policy for the euro-12 countries is now conducted by:a)The Federal Reserveb)The Bundesbankc)European Central Bankd)None of the aboveAnswer c) page 40.33)Following the introduction of the euro, the national central banks of the euro-12nationsa)disbandedb)Formed the ESCB, which is analogous to the Federal Reserve System in theUnited Statesc)Continue to perform important functions in their jurisdictionsd)b) and c) are correct.Answer d) page 40.34)The main cost of monetary union isa)The loss of national monetary and exchange rate policy independenceb)Increased exchange rate uncertaintyc)Lessened political integrationd)None of the aboveAnswer a) page 42. Costs of Monetary Union35)The euro zone remarkably comparable to the United States in terms ofa)Population sizeb)GDPc)International trade shared)All of the aboveAnswer a) page 45.36)According to the theory of optimum currency areas,a)The relevant criterion for identifying and designing a common currency zone isthe degree of factor (i.e. capital and labor) mobility within the zoneb)Exchange rates should reflect the degree to which workers are willing to move toget a better job.c)Exchange rates are determined by portfolio managers seeking the highest returnd)None of the above.Answer a) page 42.The Mexican Peso Crisis37)The Mexican Peso Crisis was touched off bya)An unsurprising announcement by the Mexican government to devalue to pesoagainst the dollar by 14 percent.b)An unexpected announcement by the Mexican government to devalue to pesoagainst the dollar by 14 percent.c)An announcement by the Mexican government to enact a currency boardarrangement with the U.S. dollard)Contagion from other Latin American and Asian financial markets.Answer b) page 47. The outgoing Salinas administration hid the true state of the Mexican economy—that’s why it was an unexpected announcement.38)Prior to the peso crisis, Mexico depended on foreign portfolio capital to finance itseconomic development. This foreign capital influxa)Caused higher domestic inflationb)Led to an over valued pesoc)Helped Mexico’s trade balancesd)a) and b) are correctAnswer d) page 48.39)The Mexican peso crisis is significant in thata)It is perhaps the first serious international financial crisis touched off by cross-border flight of portfolio capital.b)Selling by international portfolio managers had a highly destabilizing, contagiouseffect on the world financial system.c)It provides a cautionary tale th at as the world’s financial markets are becomingmore integrated, this type of contagious financial crisis is likely to occur moreoften.d)All of the above.Answer d) page 47.The Asian Currency Crisis40)The Asian Currency Crisisa)Happened just prior to the Mexican peso crisisb)Turned out to be far more serious than the Mexican peso crisis in terms of theextent of contagion.c)Was limited to Asian currenciesd)Was almost over before anyone outside the pacific rim noticed.Answer b) page 49.41)Generally speaking, liberalization of financial markets when combined with a weak,underdeveloped domestic financial system tends toa)Strengthen the domestic financial system in the short runb)Create an environment susceptible to currency and financial crises.c)Raise interest rates and lead to domestic recessiond)None of the aboveAnswer b) page 51.42)According to the “Trilemma” a country can attain only two of the following threeconditions: 1) A fixed exchange rate, (2) Free international flows of capital, (3) An independent monetary policy. This difficulty is also known asa)The incompatible trinityb)The Trilemmac)The Tobin taxd)All three can be had at the same time.Answer a) page 51. Answer b) is wrong since the question asks for another name for the Trilemma. By the way, in your personal spending, you can have only two of the following three things: quality, service, low price.43)To avoid currency crisis in the face of fully integrated capital markets, a country cana)Have a floating exchange rateb)Have a fixed exchange ratec)Have a fixed exchange rate that adjustsd)a) and b) can both help to avoid currency crisesAnswer d) page 52The Argentine Peso Crisis44)Prior to the Argentine Peso Crisisa)Argentina had a “dirty float” where the government allowed the exchange rate tofloat within wide bandsb)Argentina had a currency board arrangement with the peso pegged to the U.S.dollar at parity.c)The Argentine government defaulted on its international debts.d)Weakening of the U.S. dollar led the Argentine government to abandondollarization.Answer d) page 52-53.Fixed versus Flexible Exchange Rate Regimes45)A “good” (or ideal) international monetary system should provide:a)liquidity, elasticity, and flexibilityb)elasticity, sensitivity, and reliabilityc)liquidity, adjustments, and confidenced)none of the aboveAnswer: c - p. 5446)Advantages of a flexible exchange rates include:a)National policy autonomyb)Easier external adjustmentsc)The government can use monetary and fiscal policies to pursue whatevereconomic goals it chooses.d)All of the aboveAnswer d) page 53.47)Advantages of a fixed exchange rates includea)Reduction in exchange rate risk for businessesb)Reduction in transactions costsc)Reduction in trading frictionsd)All of the aboveAnswer d).48)Once capital markets are integrated, it is difficult for a country to maintain a fixedexchange rate. Why?a)The market forces may be stronger than the exchange rate intervention that thegovernment can muster.b)Portfolio managers will not invest in countries with fixed exchange rates.c)Because of the Tobin Taxd)None of the aboveAnswer a.49)Consider the supply-demand framework for the British pound relative to the U.S.dollar shown in the nearby chart. The exchange rate is currently $1.80 = £1.00. Which of the following is correct?a)At an exchangerate of $1.80 = £1.00,demand for Britishpounds exceeds supplyb)t an exchange rate of$1.80 = £1.00, supply forBritish pounds exceedsdemandc)nder a flexible exchangerate regime, the U.S.dollar will depreciate toan exchange rate of $1.90= £1.00d)) and c) are correctAnswer d). See page 54.50)Consider the supply-demand framework for the British pound relative to the U.S.dollar shown in the nearby chart. The exchange rate is currently $1.80 = £1.00. Whichof the following is correct?a)To “fix” theexchange rate at $1.80 =£1.00, the Federal Reserve could use contractionary monetary policy to shift the demand curve to the left.b)To “fix” the exchange rate at $1.80 = £1.00, the U.S. government could use contractionary fiscal policy to shift the demand curve to the left.c)he British Government could use fiscal or monetary policy to shift the supply curve to the right to fix the exchange rate to $1.80 = £1.00d)All of the above.Answer d. See page 54.。