The Economics of Money, Banking, and Financial Markets

Frederic S. Mishkin

ISBN #9781292094182

11th Edition

614 Questions

42,466 Students Helped

Homework Questions

Summary

Learning Objectives

Key Concepts

Example Problems

Explanations

Common Mistakes

Summary

This section examines the interplay between international finance and domestic monetary policy. It distinguishes between sterilized and unsterilized foreign exchange interventions and explains how these actions affect the monetary base and exchange rates. The balance-of-payments framework is used to track international transactions through the current and capital accounts. Additionally, the discussion covers fixed versus floating exchange rate regimes, the policy trilemma, and the roles of capital controls, exchange-rate targeting, currency boards, and dollarization in managing economic stability. The IMF’s role as an international lender of last resort and the transmission of global economic shocks to domestic monetary policy are also analyzed. Together, these concepts emphasize the complexities and trade-offs inherent in managing a country’s monetary policy in an interconnected global economy.

Learning Objectives

Key Concepts

CONCEPT

DEFINITION

Definition: The study of how equilibrium levels of output and inflation are determined by the interaction of aggregate demand (planned spending) and aggregate supply (the economy’s capacity).

The study of how equilibrium levels of output and inflation are determined by the interaction of aggregate demand (planned spending) and aggregate supply (the economy’s capacity). •

Example Problems

Example 1

If the Federal Reserve buys dollars in the foreign exchange market but conducts an offsetting open market operation to sterilize the intervention, what will be the impact on international reserves, the money supply, and the exchange rate?

Example 2

If the Federal Reserve buys dollars in the foreign exchange market but does not sterilize the intervention,what will be the impact on international reserves, the money supply, and the exchange rate?

Example 3

For each of the following, identify in which part of the balance-of-payments account the transaction is recorded (current account, capital account, or net change in international reserves) and whether it is a receipt or a payment. a. A British subject's purchase of a share of Johnson \& Johnson stock b. An American citizen's purchase of an airline ticket from Air France c. The Swiss government's purchase of U.S. Treasury bills d. A Japanese citizen's purchase of California oranges e. $\$ 50$ million of foreign aid to Honduras f. A loan by an American bank to Mexico g. An American bank's borrowing of Eurodollars

Example 4

Why does a balance-of-payments deficit for the United States have a different effect on its international reserves than a balance-of-payments deficit for the Netherlands?

Example 5

How can a large balance-of-payments surplus contribute to a country's inflation rate?