The Monetary

System in the
International Arena
Alexxa Mae L. Diaz
BS ACCOUNTANCY 2A
1. Explain the difference between autonomous
and offsetting (accomodating) transaction.
 Autonomous transactions are not affected
by circumstances outside the balance of
payments statement, making them
independent of the balance of payments. Accommodating (offsetting)
transactions , are transactions occurring
in order to compensate for differences
between payments and receipts arising
from a country’s autonomous transactions
In effect, they are balancing transactions,
These include exports, imports, transfers, public which finance payments imbalances
transactions, and net capital movements. Imports and
associated with autonomous transactions.
exports are the result of cost differences among countries
(i.e., international competitiveness). Transfers and public
transactions are based on military, political, or
humanitarian considerations (i.e., military aid or
humanitarian aid following natural disasters). Capital
movements are dependent on expectations about returns
on foreign investments (i.e., interest rate and exchange
rate considerations).
2. Since the balance of payments must always balance, how do
balance of payments deficits or surpluses emerge?
When the central bank sells domestic currency and
buys foreign currency in the Forex, the transaction
indicates a balance of payments surplus. A
balance of payments deficit (surplus) arises
whenever there is excess demand for (supply of)
foreign currency on the private Forex at the official
fixed exchange rate.
 3. If the price of euro falls from $1.250 to
$1.180, is that depreciation or devaluation?
Explain the difference.
 Depreciation. The word “devaluation” is equivalent to
depreciation but is commonly used to describe the
lowering of the exchange rate in a fixed exchange rate
system. The devaluation mechanism is similar to the
depreciation mechanism under flexible exchange rates,
that is it brings about a reduction in the price of exports
and an increase in the price of imports
 4. The dollar/euro exchange rate is $1 = E117.
Ford sells a consignment of cars to Europe for $10
million. Explain how the transaction is effected.
5. How will the dollar/euro exchange rate be affected if American
consumers consider that it is fashionable to own a bmw car?
 If it is fashionable the BMW’s
suppliers will increase export to
America and it is depreciates the US
dollars related to Euro. And Euro will
appreciate.
 6. An independent American fashion importer
decides to import Armani clothing from Italy. The
Italian exporter quoted a price of E20000 for the
consignment but the American firm had planned on
spending no more than $13,000. (a) If the exchange
rate is $1 = E12 can he afford to pay for the
consignment? (b) What should the exchange rate be
for the importer to import Armani clothing?
7. The following are indirect quotations of the dollar against
the Swiss franc, the Japanese yen, and the British pound:
$1 = SF1.4814 – 1.4828
$1 = ¥124.26 – 124.37
$1 = £0.6419 – 0.6428
(a) Calculate the midpoints in each rate and the direct
quotation of each of the above rates.
(b) Calculate the cross rates between (i) the Swiss franc and
the Japanese yen, (ii) the Swiss franc and the euro, and (iii)
the Japanese yen and the euro.
8. Do you agree with the view that a country is in
a better position if it experiences a balance of
payments deficit rather that a surplus?
A trade surplus occurs when a country's exports exceed its
imports. A trade deficit occurs when exports are fewer
than imports. A surplus appears to be better to a deficit.
Furthermore, when combined with sensible investment
decisions, a deficit might result in future higher economic
development.
 9. Assume that the United States decides to
adopt a fixed exchange rate system and pegs
the dollar in relation to the euro. Trace out
the possible effects on the US economy if (a)
inflation is higher in the United States that in
Europe, (b) the markets expect the dollar to
depreciate.
 In both circumstances, the US government will be
required to repay the difference between the fixed dollar
price and a lower real price due to inflation or
expectations.