Question

Explain the following concept and terminologies

a) The attributes of an ideal currency and the term "impossible trinity" in connection with an ideal currency

b) The J-Curve effect

c) Eurocurrrency markets

d) Libor

Answer 1

Ans a) Ideal currency possess three attributes, referred to as impossible trinity:

1. Exchange rate stability

2. Monetary independence

3. Full financial integration: complete freedom of monetary flow

The forces of economic do not allow to simultaneous achievement of all three that's why it is know as impossible trinity.

Ans b) J - Curve effect: J- curve represent that the key parameters of economy intially falls before recovering and ultimately rising due to policy changes. It forms the J shape that's why we called it J - curve effect.

Ans c) Eurocurrency Market: A money market where currency held by bank outside the country where it has legal tender to borrow and lent is known as eurocurrency market.

Ans d) LIBOR: Benchmark rate that some of the leading bank charge for short term loans. It is used for the floating rate. Its full form is London Interbank Offered Rate.