Deck 18: Exchange Rates and the Balance of Payments

Question 1

What happens in the foreign exchange market when there is a Canadian export transaction?

Answer 1

When a Canadian company exports goods and services there is an increase in foreign demand for Canadian dollars.This increased demand is met by an increased supply of foreign currencies owned by Canadian banks and available to Canadian buyers because the foreign firms must purchase Canadian dollars for a fee from a bank to settle their accounts.

Question 2

Explain how a nation might persistently import more goods than it exports and still maintain equilibrium in its balance of payments.

Answer 2

A nation could persistently import more than it exports and still maintain equilibrium in its balance of payments in several ways.It could have an offsetting surplus in transactions of other items in the current account such as services.More probably,the offsetting transactions would come through the capital account.For example,foreign investors could have a net excess in the demand for dollars equal to the excess in supply of dollars created by the trade deficit.The demand for dollars to invest in Canadian assets could maintain equilibrium in the balance of payments for many years.

Question 3

If a nation's balance of payments is always in balance,why isn't it also always in equilibrium?

Answer 3

Official bank reserves are drawn upon to settle net differences in current and capital account balances so that the balance of payments is brought into balance.However,the change in the status of official reserves represents a disequilibrium in the balance of payments.So-called autonomous transactions did not balance,and official reserves were needed to accommodate the difference.

Question 4

What were the Current Account Balance,the Capital Account Balance,and the Official Settlement Accounts Balance in Canada for the year 2011?

Question 5

List and explain the major determinants of the demand for,and supply of,the money of a foreign nation.

Question 6

What is the official settlement account and how is it used in the balance of payments?

Question 7

Explain the relationship between the current account and the capital account in the balance of payments.

Question 8

Explain how the exchange rate gets determined in a flexible exchange rate system.

Question 9

Explain how the dollar price of an imported good may change even though the foreign production cost of that product remains unchanged.

Question 10

The table below contains hypothetical international balance of payments data for Canada.All figures are in billions.Assume that there is no Statistical Discrepancy.Compute with the appropriate sign (+ or -)and enter in the table the eight missing items.What is the condition of the balance of payments in Canada?

Question 11

What is the difference between a fixed exchange rate system and a flexible (floating)exchange rate system?

Question 12

Answer the next five questions on the basis of the following hypothetical data for a hypothetical nation Economia.All numbers are in billions of dollars.Assume that there is no Statistical Discrepancy.

Question 13

What role does the foreign exchange market play in facilitating the trade of goods?

Question 14

What is a balance of payments deficit? What is a balance of payments surplus?

Question 15

Answer the next five questions on the basis of the following hypothetical data for a nation Malthusia.All numbers are in billions of dollars.Assume that there is no Statistical Discrepancy.

Question 16

What happens in the foreign exchange market when there is a Canadian import transaction?

Question 17

The table below contains hypothetical international balance of payments data for Canada.All figures are in billions.Assume that there is no Statistical Discrepancy.Compute with the appropriate sign (+ or -)and enter in the table the eight missing items.What is the condition of the balance of payments in Canada?

Question 18

Is a balance of payments deficit undesirable?

Question 19

What are the major components of the current account in the balance of payments? How is the current account balance determined?

Question 20

What is meant by currency appreciation?

Question 21

In the table below are the supply and demand schedules for Malaysian ringgits.

Question 22

In the table below are the supply and demand schedules for Russian roubles.

Question 23

What is the "managed float"?

Question 24

How are flexible exchange rates used to eliminate a balance of payments deficit or surplus?

Question 25

Describe the three major disadvantages of flexible exchange rates.

Question 26

What domestic macroeconomic adjustments would be necessary to maintain fixed exchange rates when there are persistent balance of payments deficits? What are the problems with these adjustments?

Question 27

Explain the problems with exchange rate controls.

Question 28

How does a fixed exchange rate system work? How can a nation maintain its fixed exchange rate?

Question 29

The graph below shows a change in the demand for Swiss francs from D₁ to D₂.What would happen when D₁ shifted to D₂ under a flexible exchange rate system compared to a fixed exchange rate system?