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The Monetary System in America - Coggle Diagram
The Monetary System in America
International Transactions
the balance payments summarizes a country’s transactions that require
payments to other countries and transactions
Balance of payments accounts is to provide information about demand and supply of foreign exchange.
The balance of payments is a summary statement of all transactions in a country during a year
Current and Capital Accounts
The purchase of home country assets by foreign residents is known as inward investment
The capital account records all transactions involving short-term and long-term assets.
A current account deficit means that the home country’s current payments abroad for goods, services, and transfers are greater than the corresponding receipts.
The current account records all transactions involving goods and services.
Exchange rate
The importer can reduce the exchange risk by purchasing a forward contract
High exchange rate reduces the dollar price of imported goods whereas
a low exchange rate increases the dollar price of imported goods
the currency of the country with lower interest rates trades is at a forward premium while the currency of the country with higher interest rates trades is at a forward discount
Afall in the real effective exchange rate indicates a
real depreciation
the nominal exchange rate need to change to reflect the differences between the inflation rates or general price levels among countries, that is we need to measure
Foreign exchange Market
The rate of depreciation or appreciation is the percentage change in the value of the dollar over a specified time period
the exchange rate is a relative price
. The foreign exchange market, where different national currencies are bought and sold, provides that link.
Exchange Rate Determination
when income
increases as a result of an economic boom, the demand for imports increases
The demand for a country imports is directly related to the countries income
Facts- Relative national income,Relative price levels, interest rate and expectations
Purchasing Power
Absolute PPPrefers to the price levels between two countries.
Relative PPP reflect differences in relative price levels, that is inflation rates.
The PPP theory is based on the “law of one price.”
that exchange rates between two currencies adjust to reflect differences in the price levels between the two countries.
Gold Standard
It was a system whereby the values of currencies were fixed relative to the value of gold, which was used as a unit of account and the main reserve asset.
The international monetary system can be seen as a network effecting international payments through institutions, rules, and regulations