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Free CFA-Level-I Exam Braindumps (page: 308)

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Supplementary reserves in the form of accounting entries maintained with the IMF by various governments are known as:

  1. Official Reserve Accounts.
  2. BOP funds.
  3. Special Depository Receipts.
  4. Special Drawing Rights.

Answer(s): D

Explanation:

Special Drawing Rights are accounting entries established with the International Monetary Fund which can be used to satisfy debits or credits on the BOP account. Of course, these are simply accounting devices used to keep track of the assets or debts of the different nations arising from international exchange. Ultimately, the entries must come to fruition through a supply of goods, services or unrequited transfers. So if country A uses the SDR to make a short-term payment to country B on its BOP account, it is not considered to be in default but must ultimately extinguish this debt by supplying goods or services to the B.
The SDRs are more significant for economies trying to artificially maintain a fixed exchange rate system.
For floating currencies, the BOPs can be at least partially offset through changes in exchange rates.



________ 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.

  1. Trading
  2. Settlement (Herstatt)
  3. Foreign Exchange
  4. Exchange
  5. Credit

Answer(s): B

Explanation:

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?

  1. an increase in real interest rates abroad
  2. an increase in inflation of the nation's trading partners
  3. an increase in the nation's domestic inflation rate
  4. a decrease in domestic real interest rates

Answer(s): B

Explanation:

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

  1. nation will run a current account surplus.
  2. nation's currency will appreciate.
  3. nation will run a capital account deficit.
  4. nation will run a balance of trade surplus.
  5. nation's currency will depreciate.

Answer(s): B

Explanation:

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.






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