Econ Flashcards
Define convergence.
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.
Explain how investments in human capital affect economic growth.
Forecast potential GDP based on growth accounting relations.
Explain the portfolio balance channel.
Describe factors favoring economic growth in developing countries.
Limited regulations and low administrative start-up costs encourage entrepreneurial activity and the entry of new companies.
Describe the carry trade and its relation to uncovered interest rate parity.
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.
Describe uses of self-regulation in financial markets.
An SRO may have binding regulatory authority or merely possess the agreement of its members to abide by certain rules.
Identify a triangular arbitrage opportunity and calculate its profit, given the bid-offer quotations for three currencies.
Describe equilibrium in the Solow model.
Identify underlying causes of currency crises.
Identify the factors that affect the magnitude of the exchange rate adjustment required to remove the initial current account imbalance.
Identify factors limiting economic growth in developing countries.
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.
Explain the impact of capital mobility on government intervention programs.
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.
Describe the debt sustainability channel.
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.
Evaluate how a specific regulation affects an industry, company, or security.
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).
Explain the rule for determining the bid quote on the desired (base) currency when cross currencies are both quoted against the base.
Distinguish between forward and spot rates.
Explain purposes in regulating commerce.
Differentiate between absolute convergence and conditional convergence.
Differentiate between inward-oriented policies and outward-oriented policies.
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.
Explain expansionary monetary policy under a flexible interest rate regime.
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.
Describe tools of regulatory intervention in markets.
Explain the impact of the balance of payments flows on the exchange rate.