A Japanese investor purchasing a U.S. government bond
Answer(s): D
A foreigner must pay for a U.S. bond using U.S. dollars. Therefore, the investor must exchange Japanese yen on the foreign exchange market for U.S. dollars. This transaction increases the supply of Japanese yen and the demand for U.S. dollars.
When referring to foreign exchange trades, "American terms" refers to:
Answer(s): E
"European terms" refers to the number of foreign currency units per U.S. dollar.
In a purely floating exchange rate economy, a shift toward a more expansionary fiscal policy will move the capital account toward a ________. The current account will move toward a ________.
Answer(s): B
An expansionary fiscal policy serves to raise interest rates and increase capital inflow. This moves the capital account toward a surplus. Since the changes in the capital and current accounts must balance out in a purely floating exchange rate economy, the current account moves toward a deficit.
In an open economy, the market demand for domestic products is
The domestic producer can supply both the domestic consumer and consumers abroad. Thus, market demand, which is the addition of domestic and foreign demand, can be determined by finding the domestic demand (at the intersection of the domestic demand curve with the international price) and adding it to foreign demand (found in the same way with the demand curve for foreigners).
________ utilize forward contracts to safeguard the value (in home currency terms) of assets denominated in a foreign currency on its balance sheet.
Speculators choose to be exposed to currency risk (unlike the three above who attempt to minimize/eliminate risk) by using forward contracts to benefit from exchange rate fluctuations. Arbitrageurs utilize forward contracts to rid themselves of exchange risk in the currency markets. Traders utilize forward contracts to end (or cover) the chance of loss on export or import orders that are denominated in foreign currencies.
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