Econ Flashcards

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1
Q

Define convergence.

A

Convergence means that countries with low per capita incomes should grow at a faster rate than countries with high per capita incomes until, over time, per capita income differences will be eliminated.

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2
Q

Explain how investments in human capital affect economic growth.

A
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3
Q

Forecast potential GDP based on growth accounting relations.

A
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4
Q

Explain the portfolio balance channel.

A
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5
Q

Describe factors favoring economic growth in developing countries.

A

Limited regulations and low administrative start-up costs encourage entrepreneurial activity and the entry of new companies.

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6
Q

Describe the carry trade and its relation to uncovered interest rate parity.

A

An FX carry trade involves borrowing in low-yield currencies (also known as funding currencies) and shorting the currency in favor of higher-yield currencies in which investment are made.

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7
Q

Describe uses of self-regulation in financial markets.

A

An SRO may have binding regulatory authority or merely possess the agreement of its members to abide by certain rules.

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8
Q

Identify a triangular arbitrage opportunity and calculate its profit, given the bid-offer quotations for three currencies.

A
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9
Q

Describe equilibrium in the Solow model.

A
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10
Q

Identify underlying causes of currency crises.

A
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11
Q

Identify the factors that affect the magnitude of the exchange rate adjustment required to remove the initial current account imbalance.

A
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12
Q

Identify factors limiting economic growth in developing countries.

A

Lower savings and investment restrict capital formation.

Lack of respect for property rights (including intellectual property), ineffective government protection of such rights, and undeveloped legal and regulatory systems to address grievances.

Highly educated individuals emigrate abroad for greater economic opportunity.

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13
Q

Explain the impact of capital mobility on government intervention programs.

A

A restrictive (expansionary) monetary policy under floating exchange rates will result in appreciation (depreciation) of the domestic currency. Fiscal polices under flexible exchange rates go the opposite way (i.e., restrictive policies result in depreciation).

If monetary and fiscal policies are both restrictive or both expansionary, the overall impact on the exchange rate will be unclear.

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14
Q

Describe the debt sustainability channel.

A

Countries that run large, persistent current account deficits finance these deficits by borrowing from their trade partners (resulting in capital account surpluses). This may not be sustainable as net exporters change their desire to hold the importer’s debt.

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15
Q

Evaluate how a specific regulation affects an industry, company, or security.

A

In addition to compliance costs, an even more significant burden relates to how regulation changes the economic decision-making process, alters behavior, and changes market allocations to various companies.

Regulations are usually more likely to benefit the regulated if regulators are “captive” to the industries they regulate (i.e., high exit costs).

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16
Q

Explain the rule for determining the bid quote on the desired (base) currency when cross currencies are both quoted against the base.

A
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17
Q

Distinguish between forward and spot rates.

A
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18
Q

Explain purposes in regulating commerce.

A
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19
Q

Differentiate between absolute convergence and conditional convergence.

A
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20
Q

Differentiate between inward-oriented policies and outward-oriented policies.

A

Inward-oriented: Develop domestic industries by restricting imports, even if they are less costly. Less growth and slower convergence.

Outward-oriented: Integrate domestic industries with global companies through trade. Exports are deemed key drivers of growth. Increased standard of living and faster convergence.

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21
Q

Explain expansionary monetary policy under a flexible interest rate regime.

A

Initially, expansionary monetary policy will lead to depreciation of the domestic currency as low interest rates cause a flight of capital to higher-yielding markets.

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22
Q

Describe tools of regulatory intervention in markets.

A
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23
Q

Explain the impact of the balance of payments flows on the exchange rate.

A
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24
Q

Calculate and interpret the bid-ask spread on a spot or forward foreign currency quotation and describe the factors that affect the bid-ask spread.

A

A bid-ask spread describes the difference between the higher ask price and lower bid price. Greater market liquidity, multiple lines of business with the currency dealer, and greater transaction size all decrease the bid-ask spread. Market liquidity improves with popular currency pairs and times of day when the market is more active, while spreads increase with volatility to recognize dealer risk.

25
Q

Describe the economic rationale for regulatory intervention.

A
26
Q

Explain constraints to which a dealer must adhere to prevent arbitrage.

A
27
Q

Describe anticompetitive behavior.

A

Exclusive dealings and refusals to deal, price discrimination, and predatory pricing

28
Q

Describe the relation between the long-run rate of stock market appreciation and the sustainable growth rate of the economy.

A
29
Q

Describe relations among the international parity conditions, their use in assessing fair value of exchange rates, and their usefulness in forecasting future spot exchange rates.

A
30
Q

Explain classical growth theory (Malthusian model).

A
31
Q

Explain expansionary fiscal policy under a flexible interest rate regime.

A
32
Q

Describe the flow/supply demand channel.

A
33
Q

Describe uncovered and covered interest rate parity.

A
34
Q

Explain expansionary monetary policy under a fixed interest rate regime.

A
35
Q

Explain how natural resources affect economic growth.

A

Countries with abundant natural resources may focus too much on recovering those resources, while neglecting capital and labor.

The Dutch disease describes how domestic currency appreciation from natural resources exports may stunt growth in other areas.

36
Q

Explain the ex ante version of PPP.

A

Ex ante PPP asserts that expected changes in spot exchange rates are entirely driven by expected differences in national inflation rates rather than price levels. According to ex ante PPP, countries that are expected to see persistently high (low) inflation rates should expect to see their currencies depreciate (appreciate) over time.

37
Q

List favorable developments in a domestic economy that attract capital from foreign countries (pull factors).

A
38
Q

Calculate the forward premium or discount for a given currency.

A
39
Q

Differentiate between the effectiveness of central bank intervention in developed countries versus emerging market currencies.

A

The effect of currency intervention in developed countries is insignificant because the volume of intervention is dwarfed by the average FX trading volume. The effect on emerging markets is relatively more significant but still mixed overall.

40
Q

Establish purposes in regulating financial markets

A
41
Q

Explain why potential GDP and its growth rate matter for fixed-income investors.

A
42
Q

Explain the impact of capital restrictions on government intervention programs.

A
43
Q

Explain why, empirically, the classical model has not proven to be true.

A

Per capita income growth has not resulted in population growth (as assumed by the theory). In fact, population growth has historically slowed with economic growth.

The positive impact of technological progress on per capita income has outweighed the negative impact of diminishing marginal returns and demands of a growing population.

44
Q

Explain purchasing power parity and the international Fisher relation.

A

Purchasing power parity relates spot rate movement to changes in the relative price level in two countries. The international Fisher relation involves using inflation as a proxy for changes in price level, which assumes a basic real interest rate across all countries.

45
Q

Describe benefits and costs of regulation.

A

Regulatory burden refers to the costs of regulation for the regulated entity. It can be viewed as the private costs of regulation or complying with government regulation.

Net regulatory burden results from subtracting private benefits of regulation from private costs.

46
Q

Explain how investment in technological development affects economic growth.

A
47
Q

Define endogenous growth theory.

A
48
Q

Describe classifications of regulations and regulators.

A

Statutes: Laws enacted by legislative bodies.

Administrative regulations: Rules issued by government agencies and other regulators.

Judicial law: Interpretations of courts.

Regulations come from government agencies or private, self-regulatory organizations (i.e., SROs such as FINRA in the U.S.).

49
Q

Explain methods of convergence.

A
50
Q

Explain how endogenous growth models predict that internationalizing economies will lead to a permanent increase in the economic growth rate.

A
51
Q

Identify developments that cause domestic capital to flow out of a domestic economy (push factors)

A

Low interest rates in developed countries.

Increasing weights for emerging market assets in portfolios with a global allocation.

52
Q

Describe an ideal early warning system.

A
53
Q

Explain how demographics, immigration, and labor force participation affect the rate and sustainability of economic growth.

A
54
Q

Describe regulatory interdependencies and their effects.

A

Regulatory capture – The regulated determine the regulations, restricting potential competition and aligning rivals.

Regulatory competition – Attracting desirable businesses by providing the easiest regulatory environment.

Regulatory arbitrage – Circumventing regulation by locating in less regulated areas rather than changing behavior.

55
Q

Explain the neoclassical growth theory (Solow’s model).

A
56
Q

Explain why potential GDP and its growth rate matter for equity investors.

A
57
Q

Explain expansionary fiscal policy under a fixed interest rate regime.

A
58
Q

Calculate the mark-to-market value of a forward contract.

A
59
Q

Distinguish between capital deepening investment and technological progress.

A

Refers to an increase in the capital-labor ratio and is reflected in a movement along the same per-capita production function, which increases at a decreasing rate as the capital-labor ratio reaches a relatively high level.

Technological progress changes the trajectory of the production function.