Question

Define the following terms and, briefly, indicate their relevance in international finance: a)Absorption; b)Dollarization; c) Expenditure switching policy; d) A managed float;

Answer 1

a. Absorption: Absorption refers to the total demand for all goods and services in the economy. It is calculated by adding the value of all goods and services produced and locally consumed. It is given by the sum of Consumption Expenditure, investment expenditure, Government spending and Net exports.

b. Dollarization: It is the term when foreign currency is used in addition to the domestic currency as the legal tender. Thus the process of currency substitution is referred to as Dollarization.

c. Expenditure switching policy - It refers to the macro economic policy that affects the composition of a country's expenditure on foreign and domestic goods. When the currency is depreciated to increase exports and reduce the level of imports, it is referred to as expenditure switching policy.

d. Managed Float: It refers to the system in which exchange rate fluctuate from time to time but Central Bank has the power to influence the exchange rate by buying and selling currencies within a certain range.