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| QUICK REVIEW 38-1 |
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- U.S. exports create a foreign demand for dollars
and fulfillment of that demand increases the domestic supply of foreign currencies;U.S.
imports create a domestic demand for foreign currencies
and fulfillmentof that demand
reduces the supplies of foreign currency held by U.S. banks.
- The current account balance is a nation's exports
of goods and services less its imports of goods and services plus its net investment
income and net transfers.
- The capital account balance is a nation's sale of
real and financial assets to people living abroad less its purchases of real and financial
assets from foreigners.
- A balance of payments deficit occurs when the sum
of the balances on current and capital accounts is negative; a balance of payments surplus
arises when the sum of the balances on current and capital accounts is positive.
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- In a system in which exchange rates are flexible
(meaning that they are free to float)
the rates are determined by the demand for and
supply of individual national currencies in the foreign exchange market.
- Determinants of flexible exchange rates-factors
which shift currency supply and demand curves--include changes in (a) tastes
(b) relative
national incomes
(c) relative price levels
(d) real interest rates
and (e) speculation.
- Under a system of fixed exchange rates
nations
set their exchange rates and then maintain them by buying or selling reserves of
currencies
establishing trade barriers
employing exchange controls
or incurring
inflation or recession.
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| QUICK REVIEW 38-3 |
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- Under the gold standard (1879-1934)
nations
fixed exchange rates by valuing their currencies in terms of gold
by tying their stocks
of money to gold
and by allowing gold to flow between nations when balance of payments
deficits and surpluses occurred.
- The Bretton Woods exchange-rate system
(1944-1971) fixed or pegged short-run exchange rates but permitted orderly long-run
adjustments of the pegs.
- The managed floating system of exchange rates
(1971-present) relies on foreign exchange markets to establish equilibrium exchange rates.
The system also permits nations to buy and sell foreign currency to stabilize short-term
changes in exchange rates or to correct exchange-rate imbalances which are negatively
affecting the world economy.
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