International Trade and Finance Flashcards
7 cards from real CEA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 International Trade and Finance flashcards as text
Which exchange rate regime gives a central bank the least discretion to conduct independent monetary policy?
Answer: Currency union (dollarization)
Under full dollarization or a currency union, the country adopts another currency and entirely surrenders monetary policy independence.
The Balassa-Samuelson effect predicts that countries with higher productivity growth in tradables will have:
Answer: Higher price levels and appreciation of the real exchange rate
The Balassa-Samuelson effect explains why fast-growing economies tend to have higher price levels, as rising tradable-sector wages pull up non-tradable sector prices.
An optimal currency area (OCA) theory, developed by Robert Mundell, suggests that a common currency is beneficial when member regions have:
Answer: High factor mobility and synchronized business cycles
OCA theory holds that a currency union works best when regions face symmetric shocks and factors can move freely to facilitate adjustment without exchange rate tools.
A 'sudden stop' in international finance refers to:
Answer: An abrupt reversal of capital inflows to an emerging market
A sudden stop occurs when foreign capital inflows to a country abruptly cease or reverse, often triggering a balance of payments and currency crisis.
Under the Mundell-Fleming model with a fixed exchange rate and perfect capital mobility, fiscal policy is:
Answer: Highly effective because monetary policy accommodates it
With a fixed exchange rate and perfect capital mobility, fiscal expansion raises income and the central bank must expand money supply to defend the peg, making fiscal policy highly effective.
The 'original sin' hypothesis in international debt markets refers to the inability of:
Answer: Emerging market countries to borrow internationally in their own currency
Original sin describes the structural constraint that prevents emerging market economies from issuing external debt denominated in their own currency, creating currency mismatch risk.
A country's international investment position (IIP) measures:
Answer: The stock of foreign assets owned minus foreign liabilities owed
The IIP is a balance sheet measure of a country's net financial claim on (or liability to) the rest of the world at a given point in time.