International Finance Flashcards

If the interest rate in the United States rises relative to other countries, what is the most likely short-run effect on the U.S. dollar?

Answer: The dollar appreciates as foreign investors seek higher returns

Higher U.S. interest rates attract foreign capital seeking better returns, increasing demand for dollars and causing appreciation.

A country that imports more than it exports is said to have a:

Answer: Trade deficit and a current account deficit

When imports exceed exports, a country has a trade deficit, which typically contributes to a current account deficit.

Which of the following transactions would be recorded as a credit in the U.S. balance of payments?

Answer: A Japanese investor buys U.S. Treasury bonds

A foreign investor purchasing U.S. assets represents a capital inflow, recorded as a credit in the U.S. balance of payments.

Under a managed float exchange rate system, exchange rates are determined by:

Answer: Market forces but with occasional central bank intervention

A managed float (dirty float) allows market forces to set exchange rates, but the central bank intervenes occasionally to reduce volatility.

If the Marshall-Lerner condition is satisfied, a currency depreciation will:

Answer: Improve the trade balance in the long run

The Marshall-Lerner condition states that if the sum of export and import demand elasticities exceeds one, depreciation improves the trade balance.

Speculative attacks on a fixed exchange rate are most likely to occur when:

Answer: The currency appears overvalued and reserves are dwindling

Speculators bet against currencies that appear overvalued and whose reserves signal an inability to maintain the peg.

The balance of payments always sums to zero because:

Answer: The current account and capital account are mirror images of each other

Every international transaction has two sides; current account deficits must be financed by capital account surpluses, keeping the overall balance at zero.