| Term | Definition |
| Balance of Payment | records transactions between domestic & foreign residents over a period of time |
| Balance of Power | Lend from one country to another country |
| Unilateral Transfer | represents the amount of gifts countries receive & give out |
| Floating Exchange Rate | -equilibrium of currency fluctuates
-determined by private demand and supply for the currency |
| Fixed Rates | country keep the rate fixed even if it is different from the current equilibrium rate |
| 1.Appreciation
2.Depreciation | 1.a rise in market price of a currency
2.a fall in market price of a currency |
| Revaluation | a discrete raising of the par value of a currency |
| Devaluation | a discrete reduction in the fixed par value of a currency |
| Arbitrage | the process of buying & selling to make a reckless pure profit |
| Reasons for Exchange Rate Policy | -High exchange rate
-Low exchange rate
-Reduce rate variability
-To obtain a Macro Goal
-Free Float - let the market determine the rate |
| 1.High exchange rate
2.Low exchange rate | 1.overvalued currency - high export prices, low import prices
2.undervalued currency - low export prices, high import prices |
| Clean Float | government lets the market determine the exchange rate |
| Managed or Dirty Float | an exchange rate that is generally floating (or fixed) but with the government willing to intervene to attempt to influence the market rate |
| Pegged exchange rate | an exchange rate fixed to another currency |
| Crawling Peg | adjusting the value of the exchange rate based on a formula |
| Macro Goals | -Low rate - (export - imports) up, GDP up
-Higher rate - (export - imports) down, GDP down |
| Adjustable peg | the value is fixed, but government may change the pegged-rate value |
| Single currency advantages | 1.Eliminate cost of currency transaction
2.More competitive markets through easier shopping
3.Facilitate free trade
4.Deepens economic integration & strengthens European unity |
| Single currency disadvantages | 1.Single Monetary policy
2.Elimination of exchange rate adjustments
3.Limited central fiscal policy control (government tax & spending policy) |
