ECO 322-final exam short essay

ECO 322-final exam short essay - ECO 322 Final exam A. Why...

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ECO 322 Final exam A. Why does the balance-of-payments statement “balance”? The balance of payments is a record of a nation’s economic transactions with all other nation for a given year. A credit transaction is one that results in a receipt of payments from foreigners, whereas debit transaction leads to a payment abroad. Owing to double-entry book-keeping, a nation’s balance of payments will always balance. B. What does the balance of international indebtedness measure? How does this statement differ from the balance of payments? The balance of international indebtedness measures one countries’ economic transaction over a period of one year or one quarter. It indicates one country’s international investment position. It breaks down international investment holdings into several categories so that policy implications about liquidity status can be offered. But the balance of payments records the flow of economic transactions between the residents of one country and the rest of the world. The international investment position of the United States at a particular time is measured by the balance of international indebtedness. Unlike the balance of payments, which is a flow concept (over a period of time), the balance of international indebtedness, is a stock concept (at a single point in time). C. The supply and demand for foreign exchange are considered to be derived schedules. Explain. The equilibrium rate of exchange in a free market is determined by the intersection of the supply and demand schedules of foreign exchange. These schedules are derived from the credit and debit items in a nation’s balance of payments. D. What is meant by the forward market for foreign exchange? How does it differ from the spot market? Forward market refers to the over-the-counter financial market in contracts for future delivery. But spot market is the foreign exchange can be bought and sold for delivery immediately. For example, if you know the spot price is $ A /£ today, and you guess after C months, its price will increase to $ B /£. So you save pounds in bank with the spot price of A to gain interest. C months later, you sell pounds at price B. Foreign traders and investors often deal in the forward market for protection from possible exchange-rate fluctuations. However, speculators also buy and sell currencies in the futures markets in anticipation of sizable profits. In general, interest arbitrage determines the relation between the spot rate and the forward rate. E.
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This note was uploaded on 07/07/2011 for the course ECON 322 taught by Professor Steven during the Spring '11 term at Southern New Hampshire University.

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ECO 322-final exam short essay - ECO 322 Final exam A. Why...

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