Exercise 4. Fill in the gaps in the text with the appropriate words from boxes.

Part a)

monetary policy instruments, open market operations, inflation, prices, unemployment,bank reserve requirement,interest rate policy, supply of money

 

Monetary policy is the process by which the monetary authority of a country controls the (1)_____. The official goals of optimal monetary policy usually include relatively stable (2)_____and low (3) _____. As it is responsible for price stability, the central bank must regulate the level of (4) _____by controlling money supplies. It uses a variety of (5) _____ to influence inflation, unemployment and economic growth in general. The most important among them are (6) _____, (7) _____and (8) _____.

Part b)

employment, reserve requirement(3), bank runs, overheating, interest rate(3)

 

At times of slow economic growth the central bank can try to lower the (1) _____and thus entice businesses to expand by getting access to cheaper credit. A low (2) _____ implies that firms can loan money to invest in their capital stock and pay less interest. Such interest rate policy can influence the level of (3) _____.On the other hand, raising the (4) _____ is often used in times of high economic growth to keep the economy from (5) _____and avoid market bubbles.

As a rule, commercial banks are mandated to keep a certain percentage of all deposits in the bank. This is known as the (6) _____. By decreasing the (7) _____the central bank allows commercial banks to lend out more money and the money supply increases. The (8) _____ was initially introduced in the 19th century as an attempt to reduce the risk of banks overextending themselves and suffering from (9) _____.

Part c)

liquidity, securities, foreign exchange interventions, official gold reserves,open market operations, increases, reduces, lowering

(1) _____ are the fastest and most effective tool available for the central bank to control inflation, maintain price stability and adequate money supply in an economy. Usually they take the form of buying or selling (2) _____ to achieve an interest rate target in the interbank market. Such transactions either inject the market with (3) _____or absorb extra funds, directly affecting the level of inflation. When a central bank buys securities, it (4) _____the money supply while (5) _____the supply of the specific security. Conversely, selling of securities by the central bank (6) _____the money supply. Such operations may take the form of (7) _____,whenthe central bank sellsmoneyfromforeign exchange reserves. (8)_____are also widely used in open market operations.

Exercise 5.

Part a) Fill in the gaps in the table below.

Noun	Verb	Person
		purchaser
	save
employment
		keeper
	carry
consumption

 

Part b) Complete these sentences using the words from the above table.

1. The Chinese central bank _____huge deposits of gold bullion.

2. _____market of Russia is undergoing sustained development.

3. Personal _____were withdrawn from bank accounts during the financial crisis.

4. _____of new banking products lately are not very active.

5. The salaries of bank _____were raised because of high inflation in the country.

6. The buyer claimed compensation because the ____did not deliver goods in time.

Exercise 6. Match the verbs on the left with words and word-combinations on the right.

1) draw up	a) the gold standard
2) encourage	b) shortfalls in liquidity
3) implement	c) profits
4) carry out	d) guidelines
5) issue	e) money supply
6) peg to	f) monetary policy
7) cover	g) economic growth
8) remit	h) fiscal policy
9) manage	i) banknotes

Over to you

Give your written opinion why monetary policy is important in economic life of every country.

 

UNIT VI

FINANCING INTERNATIONAL TRADE

Warm up

1. What do you think of Russia’s role in the world trade?

2. What are the biggest trade partners of Russia?

3. How can payments be made if you buy goods in other countries?

Section A

Reading 1

International Payments

Despite the fact that cash participate in any commercial transaction, selling or buying goods in foreign markets is normally accomplished through the mechanism of international payments. This mechanism requires that any payment for products delivered or services provided to a foreign client should be made on the basis of a commercial contract. In respect of products such contract must specifically feature their description, the terms of delivery, date and means of payment, the currency in which settlement is to be effected, and the list of documents required to arrange clearance of the products through customs.

Financing of international transactions within this mechanism involves trade in the currency specified in contracts. It can be the currency of the exporter, the currency of the importer or any other convertible currency agreed by both parties to a contract. Foreign currency has to be purchased in a market governed by supply and demand. The demands for payment by the sellers in one country are balanced with those of another through clearing institutions, mainly the banks in the leading financial centers. There exists an interconnected international network of banks that have checking accounts with one another and can shift funds back and forth. The overall balancing of the accounts between nations is accomplished through movements of capital from one country`s bank balances to another`s, borrowing from the International Monetary Fund, and even (in the past) actual shipments of gold.

Currencies are traded by dealers in a foreign exchange market. Currency supply is formed by exports of products and services, by foreign direct investment and foreign loans, etc. whereas imports, foreign direct investment abroad and other factors create demand for currency. Under these circumstances the balance of supply and demand constantly changes, resulting in fluctuations of a currency’s exchange rate. If a contract stipulates the payment in a currency other than that in which the exporter (or the seller) usually operates, such exporter is exposed to the risk of exchange rate fluctuations. Devaluation of the contract currency can have even more dramatic financial consequences for the seller.

The Foreign Exchange Risk described above is not the only one in exporting or importing transactions. The range of other risks facing participants of international trade includes Payment Risk, Interest Rate Risk, Delivery Risk, Counterparty/bank Risk, etc. The sides to a contract can lower the risks involved and facilitate the conduct of commercial transactions by attracting various intermediaries such as banks and other financial institutions.

Discussion

Answer the following questions:

1. What are international payments based upon?

2. What currencies are used in international payments?

3. How do the clearing institutions accomplish the overall balancing of the accounts between nations?

4. What is the use of borrowings from the International Monetary Fund?

5. Are actual shipments of gold commonly used nowadays to balance the accounts between nations?

6. Why are some exporters exposed to the risk of exchange rate fluctuations?

7. How is it possible to facilitate the conduct of commercial transactions and lower the risks involved?

 

Reading 2