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Principles of Economics 3e

Key Terms

Principles of Economics 3eKey Terms
appreciating
when a currency is worth more in terms of other currencies; also called “strengthening”
arbitrage
the process of buying a good and selling goods across borders to take advantage of international price differences
depreciating
when a currency is worth less in terms of other currencies; also called “weakening”
dollarize
a country that is not the United States uses the U.S. dollar as its currency
floating exchange rate
a country lets the exchange rate market determine its currency's value
foreign direct investment (FDI)
purchasing more than ten percent of a firm or starting a new enterprise in another country
foreign exchange market
the market in which people use one currency to buy another currency
hard peg
an exchange rate policy in which the central bank sets a fixed and unchanging value for the exchange rate
hedge
using a financial transaction as protection against risk
international capital flows
flow of financial capital across national boundaries either as portfolio investment or direct investment
merged currency
when a nation chooses to use another nation's currency
portfolio investment
an investment in another country that is purely financial and does not involve any management responsibility
purchasing power parity (PPP)
the exchange rate that equalizes the prices of internationally traded goods across countries
soft peg
an exchange rate policy in which the government usually allows the market to set the exchange rate, but in some cases, especially if the exchange rate seems to be moving rapidly in one direction, the central bank will intervene
Tobin taxes
see international capital flows
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