lect 8

• If domestic monetary authorities peg the exchange rate, they must buy domestic currency with foreign exchange reserves
• An excess supply of domestic currency could arise from the current account or the capital account.
• A crisis can arise if authorities run out of foreign exchange reserves while maintaining a pegged exchange rate.
• In a floating exchange rate regime, market forces determine the exchange rate.
• Under fixed exchange rates, authorities do not need foreign exchange reserves to maintain the exchange rate.

  False
• Under a flexible exchange rate, the exchange rate is determined by supply and demand for the currency.
• Match the topic with its description:

  Balance of Payments ↔️ Measurement and meaning

  Foreign Exchange Market ↔️ How exchange rates are pegged

  News in FX Markets ↔️ Role in driving prices
• What do UK sales to the US generate in exchange for pounds?

  Offers of dollars
• In the market for foreign exchange, the price of £1 is measured in dollars.
• In the long run, exchange rate changes must equal inflation differentials according to purchasing power parity (PPP).
• New information in the foreign exchange market is the unexpected and unpredictable part of what happens.
• What are the two main components of the balance of payments accounts?

  Current and financial accounts
• Any transaction that demands foreign exchange is recorded as a debit item.
• The balance of payments measures changes in net wealth.

  False
• What does a current account deficit mean for a country?

  Net borrowing from abroad
• If demand for sterling exceeds its supply, the exchange rate will rise.