C9 - Macro-Economics (5-15 Qs with C8) BC Flashcards
The Trade Balance is given as:
A) The sum of visible trades
B) The total of Britain’s visible and invisible trades
C) Britain’s Balance of Payments
D) Transactions carried out in financial assets
B - The total of Britain’s visible and invisible trades
The trade balance is defined as the sum of visible and invisible trade. Visible trade refers to the import and export of physical goods. Invisible trade refers to the flow of services. The trade balance therefore represents exports less imports of goods and services.
Which of the following is/are likely to lead to an increase in demand for sterling?
1. British exporters increase sales in Japan
2. A French manufacturer builds a factory in Britain
3. The number of Canadian tourists visiting British increases
A) All of the above
B) 1 and 2 only
C) 2 only
D) 1 and 3 only
A - All of the above
In National Income Accounting the difference betwen GDP and GNP is?
A) GNP is GDP plus Net Property Income from abroad
B) GNP is GDP plus deprecitation
C) GNP is GDP plus taxes less subsidies
D) GDP is GNP net of transfer payments
A - GNP is GDP plus Net Property Income from abroad
Gross domestic product (GDP) and gross national product (GNP) are both ways to measure the total value of a country’s goods and services, but they differ in how they calculate that value:
* GDP - Measures the value of all goods and services produced within a country’s borders, by citizens and non-citizens. GDP includes the output of factories owned by foreign companies, but not the income earned by foreign factors within the country.
* GNP - Measures the value of all goods and services produced by a country’s citizens, both domestically and abroad. GNP includes income from overseas investments by a country’s residents, but not foreign investment within a country’s borders.
GDP is the most commonly used economic indicator, especially for comparing countries. However, GNP may be a better metric for countries with substantial foreign investments. A large difference between a country’s GNP and GDP can indicate a high level of integration into the global economy.
The following statements relate to national accounting aggregates.
1. Gross Domestic Product at factor cost excludes the value of indirect taxes
2. National Income includes the cost of transfer payments
3. Gross National Product includes net property income from abroad
Which of the above is correct?
A) 1 and 2 only
B) 2 and 3 only
C) 1 and 3 only
D) All of the above
C - 1 (Gross Domestic Product at factor cost excludes the value of indirect taxes) and 3 (Gross National Product includes net property income from abroad)
Gross domestic product (GDP) is a monetary value that measures the total market value of all goods and services produced by a country or region in a specific time period. GDP is a key indicator of a country’s economic health and growth.
Gross National Product (GNP) is a measure of the total value of all goods and services produced by a country’s residents and businesses, regardless of where they are produced. It’s calculated by adding a country’s GDP to the income earned by its residents from foreign investments, and subtracting the income earned by foreign residents within the country.
GNP is one of the most common ways to measure a country’s economic health. It’s different from Gross Domestic Product (GDP), which measures the value of all goods and services produced within a country’s borders, regardless of who owns the means of production.
A UK fund manager manages a Euro portfolio worth £3.5m when the EU/GBP exchange rate is 0.75. At the end of the period the fund is worth £3.6m when the EUR/GBP rate is 0.80.
What is the Euro percentage return?
A) +12.85
B) -3.57
C) +3.70
D) -6.67
B: -3.57
((£3.6m/0.80)/(£3.5m/0.75)) -1 = -0.0357, hence the return in EUROs is -3.57%
CHECK BOOK AGAIN AS I AM GETTING 0.0971
A country is said to be internal and external balance when:
A) The PSNCR and the capital account of the balance of payments aere both zero
B) Private savings euqals private investment and exports of goods equal imports of goods
C) Aggregate demand is at full employment and the current account of the balance of payments balances
D) Inflation is zero and the exchange rate is stable
PSNCR stands for Public Sector Net Cash Requirement
C - Aggregate demand is at full employment and the current account of the balance of payments balances
Which of the following is/are included as invisible items on the current account of the balance of payments?
1. Spending on training in the UK by overseas students
2. Government aid to a lesser developed country
3. Returns on an investment made abroad by a UK resident
A) All of the above
B) 2 and 3 only
C) 1 and 2 only
D) 2 only
A - All of the above
Invisible items are services.
Which of the following items constitutes a leakage from the circular flow of income of an economy?
A) The purchase of domestically produced good by a domestic company
B) The purchase of domestically produced good by a foreign company
C) The payment of value added tax on goods sold in the domestic market
D) Government aid to companies
C - The payment of value added tax on goods sold in the domestic market
Foreign factors are excluded, whereas tax is a leakage.
In the circular flow of income model, leakage refers to money that leaves the economy, or is withdrawn from the flow of income. This can include taxes, savings, and imports. VAT is a type of leakage because it reduces the flow of income.
The Spot Exhange rate is £1 : $1.50, the eurodollar rate is 5% and the Eurosterling rate is 10%
What is the forward rate?
A) 1.4114
B) 1.4318
C) 1.5050
D) 1.5714
B - 1.4318
Forward = Spot x ((1+r quoted)/(1+r base)
So $1.5000 x (1.05 / 1.10) = $1.4318
In the classical model of the economy what effect would a change in the nominal Money Supply have?
A) A fall in rate of interest
B) Increased output and employment
C) A reduction in the real money supply
D) An equi-proportionate change in wages and prices and no change in output and employment.
D - An equi-proportionate change in wages and prices and no change in output and employment.
Prices and wages are fully flexible under the classical economic theory.
Classical economic theory is a school of economic thought that originated in the late 18th century and was based on the idea that a free market would value commodities through price discovery. It was developed shortly after the rise of Western capitalism and was the dominant economic theory in Great Britain until around 1870. Some key ideas of classical economic theory include: Free markets, Labor-based value, Supply-side perspective, Circular flow of production, Profit and Optimal training.
The International Fisher Effect implies:
A) The relationship between forward and spot exchange rates is driven by the two country’s interest rate differentials
B) The price of the same goods are equal (in real terms) across countries
C) The relationship between forward and spot exchange rates is driven by the difference in inflation rates between the two countries
D) In the absence of restrictions, real interest rates between countries must be equal
D - In the absence of restrictions, real interest rates between countries must be equal
The International Fisher Effect hypothesis states if investors can choose where they invest without restriction that the real interest rate will be the same everywhere.
The long term Phillips curve shows that:
A) The inflation/unemployment trade-off continues
B) There is no long run inflation/unemployment trade off
C) The short run phillips curve is irrelevant
D) In the long run unemployment can be kept below the natural rate with no inflation
B - There is no long run inflation/unemployment trade off
The LRPC illustrates that there is no trade-off between inflation and unemployment in the long run. This is because the short-run trade-off between the two variables eventually adjusts out.
Which of the following theories when combined lead to conclusion that the best estimate of future spot exchange rates is the current forward rate?
1. Interest rate parity (IRP)
2. Purchasing power parity (PPP)
3. International Fisher effect
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) All of the above
D - All of the above
If purchasing power parity, the International Fisher Effect and Interest rate parity all hold then the future exchange rate will equal the forward rate. In practice only one relationship (interest rate parity) holds in both the short and long run.
- IRP is a theory that describes the relationship between the interest rates and exchange rates of two countries. It states that the difference in interest rates between two countries should be equal to the difference between their forward and spot exchange rates.
- PPPs are currency conversion rates that try to equalize the purchasing power of different currencies by eliminating price level differences between countries. PPPs are calculated by comparing the price of a basket of goods and services in one country to the price of the same basket in another country. If a hamburger costs £2 in London and $4 in New York, the PPP exchange rate is 1 pound to 2 U.S. dollars.
Assuming output and employment remain constant, then 1% rise in the money supply will lead to which of the following:
A) A 1% rise in inflation
B) A 1% rise in the real money supply
C) A 1% fall in inflation
D) A 1% fall in interest rates
A - A 1% rise in inflation
If output of the economy is constant then 1% increase in the money supply leads to a 1% increase in prices. This is known as the quantity theory of money.
The quantity theory of money (MV=PT) states that changes in (nominal) money supply lead to equal and proportional changes in the price level (inflation)
Consider the following statements about inflation:
1. If prices rise faster than expected, borrowers gain at the expense of lenders
2. If inflation is fully anticipated, the real rate of interest equals the nominal rate
3. If the money supply is fixed, there will be no inflation
A) 1 only
B) 2 and 3 only
C) 1 and 3 only
D) 1 and 2 only
A - 1 (If prices rise faster than expected, borrowers gain at the expense of lenders)
An increase in interest rates which results from an increase in government spending is called:
A) Crowding out
B) Crowding in
C) Multiplier
D) Income effect
A - Crowding Out
Expansionary fiscal policy means increasing government expenditure and reducing taxes (AKA running a budget deficit) to stimulate aggregate demand. One criticism of this is that a budget deficit will need to be funded by issuing govenment bonds. This increase in demand for loanable funds causes interest rates to rise, which in turn may reduce (crowd out) private sector investment and cause consumption to fall as the marginal propensity to save increase.
Which of the following is an example of cyclical unemployment?
A) A textile worker made redundant becauase of permenant fall in the demand for UK Textiles
B) A building worker temporarily laid off because of bad weather
C) A manufacturer worker made redundant during a recession
D) A car worker made redundant because of the introduction of robots
C - A manufacturer worker made redundant during a recession
Cyclical unemployment is also known as Kensyian unemployment
- Seasonal unemployment: This type of unemployment occurs when there are changes in the weather or in the nature of work in certain industries, such as agriculture, tourism, or retail.
- Structural unemployment: This type of unemployment occurs when a company’s demand for new skills doesn’t match the skills of its employees. It can be caused by technological changes, globalization, or policy and regulations.
An open market operation between domestic money and domestic bonds designed to neutralise the tendency of Balance of Payment imbalances to change the domestic money supply is known as?
A) Immunisation
B) Neutralisation
C) Funding
D) Sterilisation
D - Sterilisation
Changes in money supply can be offset by the pricess of sterilisation which involves selling government bonds to reduce the money supply.
If the EUR/GBP 6 months forward quote is EUR 1.2410/1.2450 and the 6 month forward premium is 47/45, what is the spot quote?
A) EUR 1.2880 / 1.2900
B) EUR 1.2457 / 1.2495
C) EUR 1.2860 / 1.2920
D) EUR 1.1960 / 1.1980
B - 1.2457 / 1.2495
Forward Rate = Spot Rate - Premium / + Discount
Rule of thumb: If the forward adjustment descends from bid to ask (left to right) deduct it from the spot price. This is market convention for quoting a ‘premium’.
However, in this example we need to work backwards from the forward quote. So Spot Rate = Forward Rate + Premium / - Discount.
1.2410 + 0.0047 = 1.2457, 1.2450 + 0.0045 = 1.2495.
A cross rate is defined as:
A) The difference between the bid and offer price
B) The rate used in a swap agreement calculated as the difference between the current fixed and the variable interest rate
C) The fee payable for participating in an uncrossing auction
D) A non-US Dollar foreign exchange rate between two countries
D - A non-US Dollar foreign exchange rate between two countries
Cross currency rate is an exchange rate between two international currencies in context with valuation with a third common currency. USD is usually accepted as the third currency.
In a closed economy with no government sector the marginal prosensity to save (MPS) is 0.2. What are the marginal prosensity to consume (MPC) and multiplier respectively?
A) 0.8 / 5
B) 5 / 1.25
C) 0.5 / 5
D) 0.8 / 1.25
A - 0.8 / 5
The marginal prospensity to consume (MPC) is how much of each additional £ of income spent rather than saved. Note that 1-MPC = MPS.
So 1 - 0.2 (MPS) = 0.8 MPS. 1/0.2 = 5 multiplier (like yield mulipliers)
All other things being equal if a proportionate tax was imposed on personal disposable income, would there be:
1. A decrease in aggregate demand
2. An increase in aggregate demand via the multiplier
3. An increase in the steepness of the consumption curve
4. A decrease in the steepness of the consumption curve
A) 1 and 3 only
B) 1 and 4 only
C) 2 and 3 only
D) 2 and 4 only
B - 1 (decrease in aggregate demand) and 4 (decrease in the steepness of the consumption curve)
Higher taxes will reduce aggregate demand. Higher taxes reduce consumers disposal income and as a result consumption expenditure.
Aggregate demand (AD) = Consumption (C) + investment spending (I) + government spending (G) + Exports - imports
Which of the following is NOT true regarding the natural rate of employment?
A) Such unemployment is completely voluntary
B) It includes cyclical unemployment
C) It includes frictional unemployment
D) It includes structural unemployment
B - It includes cyclical unemployment is NOT TRUE
Natural rate of employment does not include cyclical unemployment
- Cyclical unemployment is a type of unemployment that occurs when the economy’s business cycle changes, leading to job losses
- Frictional unemployment is a short-term period of unemployment that occurs when people are voluntarily changing jobs or entering the workforce. It’s also known as search unemployment.
- Structural unemployment is a type of long-term unemployment that occurs when there’s a mismatch between the skills of the unemployed and the skills needed by employers. It can be caused by a number of factors, including: technological changes, economic changes, and Industry development.
Assuming that the International Fisher Effect applies, the £ interest rate is 7% and the inflation is 3% in the UK. If the US interest rate is 6%, what is US inflation?
A) 1%
B) 2%
C) 3%
D) 4%
B - 2%
Using the International Fisher Effect equation (1.06/1.07) = (1 + USi/1.03), hence (1.06/1.07) x 1.03 = 1.02m so US inflation is 2%.