Econ

Question 1

Value of Mark-to-Market Forward Contract

Answer 1

Vt = [(FPt - FP) * (contract size)] / [1+R (days/360)]

Question 2

Covered Interest Arbitrage Formula

Answer 2

F = S0 * [1+Ra (days/360)] / [1+rb (days/360)]

Question 3

Uncovered Interest Parity Formula

Answer 3

E(%ΔS)(a/b) = Ra - Rb

Question 4

International Fisher Relation Formula

Answer 4

Ra - Rb = E(inflation A) - E(inflation B)

Question 5

Relative PPP

Answer 5

%ΔS(a/b) = inflation (A) - inflation (B)

Question 6

Real Exchange Rate (a/b) =

Answer 6

= equilibrium real exchange rate + (real interest rateB - real interest rateA) - (risk premiumB - risk premiumA)

Question 7

Taylor Rule Formula

Answer 7

r = rN + a(π - π) + B(y - y)

Question 8

Profit on Carry Trade =

Answer 8

Interest differential - change in the spot of investment currency

Question 9

BOP Flow Mechanism

Answer 9

Current account deficit puts downward pressure on the exchange value of a country’s currency.
The decrease in the value of the currency may restore the current account deficit to balance depending on the initial deficit, the influence of exchange rates on exports and import prices, and the price elasticity of demand of traded goods.

Question 10

BOP Portfolio Composition Mechanism

Answer 10

Investor countries with capital account deficits (and current account surpluses) may find their portfolios dominated by investments in countries persistently running capital account surpluses (and current account deficits).
If/when the investor countries rebalance their portfolios, the investee countries’ currencies may deprecate.

Question 11

BOP Debt Sustainability Mechanism

Answer 11

A country running a current account deficit may be running a capital account surplus by borrowing from abroad.
When the level of debt gets too high relative to GDP, investors may question the sustainability of this level of debt, leading to a rapid depreciation of the borrower’s currency.

Question 12

Monetary/Fiscal Policy: Expansionary / Expansionary & Capital Mobility: High / Low –> Exchange Rates

Answer 12

Uncertain / Depreciation

Question 13

Monetary/Fiscal Policy: Expansionary / Restrictive & Capital Mobility: High / Low –> Exchange Rates

Answer 13

Depreciation / Uncertain

Question 14

Monetary/Fiscal Policy: Restrictive / Expansionary & Capital Mobility: High / Low –> Exchange Rates

Answer 14

Appreciation / Uncertain

Question 15

Monetary/Fiscal Policy: Restrictive / Restrictive & Capital Mobility: High / Low –> Exchange Rates

Answer 15

Uncertain / Apreciation

Question 16

Pure Monetary Model

Answer 16

PPP holds at any point in time and therefore, an expansionary monetary policy results in an increase in inflation and a depreciation of the home currency.

Question 17

Dornbusch Overshooting Model

Answer 17

A restrictive monetary policy leads to appreciation of the domestic currency in the short run and then a slow depreciation toward the LT PPP value.

Question 18

Portfolio Balance Model (Asset Market Approach)

Answer 18

Focuses on the LT implications of sustained fiscal policy (deficit or surplus) on currency values.
When the govt. runs a fiscal deficit, it borrows money from investors and sustained deficits will lead to eventual depreciation of the home currency.

Question 19

Warning signs of impending Currency Crisis

Answer 19

1) Terms of trade deteriorate
2) Official foreign exchange reserves dramatically decline
3) Real exchange rate is substantially higher than the mean-reverting level.
4) Inflation increases
5) Equity markets experience a boom-bust cycle
6) Money supply relative to bank reserves increases
7) Nominal private credit grows

Question 20

Preconditions for Economic Growth (positive correlations)

Answer 20

1) Level of savings and investment
2) Developed financial markets and intermediaries
3) Political stability, rule of law, and property rights
4) Investment in human capital (education, HC, etc.)
5) Favorable tax and regulatory systems
6) Free trade and unrestricted capital flows

Question 21

Capital Deepening

Answer 21

An increase in the capital stock and the capital-to-labor ratio. Due to diminishing marginal product of capital, increases in the capital stock can lead to only limited increases in output and labor productivity if hte capital-to-labor ratio is already high.

Question 22

Growth Rate in Potential GDP

Answer 22

LT growth rate of technology + a(LT growth in K) + (1-a)(LT growth in L)

Question 23

Classical Growth Theory:

Answer 23

Growth in real GDP/Capita is temporary - when it rises above the subsistence level, a population explosion occurs and GDP/Capita is driven back down to the persistence level.

Question 24

Neoclassical Growth Theory:

Answer 24

The sustainable growth rate of an economy is a function of population growth, labor’s share of income, and the rate of technological development. Growth gains from other means, such as increased savings are only temporary.

Question 25

Endogenous Growth Theory:

Answer 25

Acknowledges the impact of technological progress with ing the model. Investments in capital can have constant returns, unlike neoclassical theory which assumes diminishing returns to capital. This assumption allows of a permanent increase in growth rate attributable to an increase in savings rate. R&D expenditures are often cited as examples of capital investment that increase technological progress.

Question 26

Statutes

Answer 26

Laws made by legislative bodies

Question 27

Administrative regulations

Answer 27

Rules issued by govt. agencies or other bodies authorized by the govt.

Question 28

Judicial law

Answer 28

Findings of courts