FIN 4120 Test 1 Study Guide Solutions

FIN 4120 Test 1 Study Guide Solutions business cycle - Ans:-Fluctuations in economic activity, such as employment and production Tracks real GDP overtime Eurocurrencies - Ans:-domestic currencies of one country on deposit in a second country Disinflation - Ans:-a general rise in prices but at a slower rate quantitative easing - Ans:-when the Fed buys longer-term government bonds or other securities in the market to stimulate economy balance of payments - Ans:-a summary statement of the flow of economic transactions between residents of different countries over time 4 Components of BOP - Ans:-1. Current account 2. capital account 3. Official reserves ©GRACEAMELIA 2024/2025 ACADEMIC YEAR. ALL RIGHTS RESERVED FIRST PUBLISH OCTOBER 2024 Page 2/10 4. Errors and Omissions Current Account - Ans:-1. Imports & Exports of goods 2. Imports & Exports of Services 3. Investment Income 4. Unilateral Transfers Investment Income - Ans:-project income from investment made in another country ex: VW in Chatt unilateral transfers - Ans:-aid sent to countries, one way inflow/outflow trade deficit - Ans:-more imports than exports trade surplus - Ans:-more exports than imports US biggest trading partners - Ans:-1. Canada 2. China 3. Mexico ©GRACEAMELIA 2024/2025 ACADEMIC YEAR. ALL RIGHTS RESERVED FIRST PUBLISH OCTOBER 2024 Page 3/10 Capital/ Financial Account - Ans:-1. Direct foreign investment - "lumpy" - difficult to exit position, 10% of account 2. Portfolio Investments -financial assets, stocks/bonds, 10% of account 3. Other investments (short term, foreign bank accounts) U.S. runs current account deficits - Ans:-true U.S. runs capital/financial surpluses - Ans:-True Net errors and omissions - Ans:-number to account for black/gray market transactions Official Reserves - Ans:-total reserves held by monetary authority in a country Why is USD dominant? - Ans:-- 85% of FX transactions - more than 60% of official reserves are held in the form of the USD - Stable institutions, currency, treasuries are safe - World's largest economy, large liquid markets ©GRACEAMELIA 2024/2025 ACADEMIC YEAR. ALL RIGHTS RESERVED FIRST PUBLISH OCTOBER 2024 Page 4/10 Chapter 17: Foreign Direct Investment (pg 467-470) - Ans:--Limiting a firm's activities to exporting only minimizes political risk (legal, regulations, transferability/convertibility risk, expropriation) - Limiting a firm's activities, however, can negatively affect a company's growth strategy FX Market - Ans:-single largest financial market in the world 6.6 trillion changes hands daily 10x global GDP buyers/sellers determine exchange rates 24 hours/5 days a week Dealer - Ans:-acts as a broker, but has inventory Broker - Ans:-connects buyers and sellers