Chapter Review: Key Points

Date: 2015-10-07; view: 624.

Chapter Objectives

INTERNATIONAL FINANCE

After you have studied this chapter, you should be able to discuss the advantages and disadvantages of fixed and flexible systems of international payments; the problems encountered when currency flows or exchange controls are used to maintain exchange rates at nonequilibrium values; explain the persistence of U.S. balance of payments deficits; and describe some possible reasons for the decline of the dollar from a position of undisputed primacy as the world's medium of exchange.

1. Since we have no world currency, we must establish the value of each national currency in terms of all others. The exchange rate is the value of one currency in terms of another.

2. Balance of payments accountsrecord the flows of money into and out of a country and provide information about trade relationships among countries.

3. Flexible, оr floating, systems of exchange rates permit the values of currencies to be set by market forces. If a country experiences a balance of payments surplus (deficit) under such a system, it is an indication that the country's citizens or government (foreigners) desire foreign (domestic) currencies.

4. A fixed exchange rate systemimposes price ceilings and floors on currencies, often resulting in persistent disequilibria in balances of payments.

5. Explanations for the decline of the dollar in the 1970s range from relative inflation to expectations of continued inflation and payments deficits to federal budget deficits to the emergence of other strong international currencies to the cartelization of oil to too rapid monetary growth. Opposite trends then strengthened the dollar until 1985. Each of these explanations bears the germ of truth, but none alone is adequate to explain the dance of the dollar. (1491 digits)