________ risk is the risk that a bank will deliver currency on one side of a foreign exchange deal while the counterparty does not send any money in return.
Answer(s): B
In order to minimize credit risk, most banks will transact large amounts only with blue chip customers.
Which of the following would most likely cause a nation's currency to appreciate?
Inflation in a nation's trading partners implies that prices are rising abroad. This would increase the demand for the nation's output because consumers will prefer imports to domestic output because it will be relatively less expensive since its prices are not rising. Increased demand for output increases the demand for the nation's currency and therefore the currency will appreciate.
If restrictive monetary policy results in a deceleration in the domestic inflation rate and higher real interest rates, other things constant, the
Contractionary monetary policy will lead to a deceleration in inflation and higher real interest rates. As a result, demand for the nation's exports and assets will increase as will the demand for the nation's currency. This in turn will cause the currency to appreciate.
Which of the following would most likely cause a nation's currency to depreciate?
Higher relative inflation and a reduction in domestic real interest rates causes the demand for the nation's exports and assets to decline. This in turn causes the demand for the nation's currency todecline. Once the demand for the currency falls, the "price" of the currency (or the exchange rate) falls. This is a depreciation in the currency.
The ______of services from foreigners ________ the supply of dollars to the exchange market.
Answer(s): D
The import of services from foreigners expands the supply of dollars to the exchange market; service imports are entered on the balance of payments accounts as debit items.
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