Economics

Question 1

What is the measure of standard of living?

Answer 1

GDP per capita

Question 2

What is an important factor in predicting returns on aggregate equity markets?

Answer 2

Upper limit of real growth of economy.

Question 3

What should be the fiscal policy (expansion/contraction) in case of-
a) Actual GDP>Potential GDP
b) Actual GDP<Potential GDP

Answer 3

a) Contraction
b) Expansion

Question 4

What is the assumption of cobb douglas production function?

Answer 4

Constant return to scale

Question 5

What is the relationship between per capita income and capital deepening?

Answer 5

Diminishing return to scale.
Since lower the ‘a’, lower the benefit of capital deepening.
Y/L = T*(K/L)^a

Question 6

What is the relationship of Marginal Production of Capital and Marginal cost of capital in state of equilibrium?

Answer 6

MPC = MCC
a*Y/K = r

Question 7

True or False
Since for developed countries capital per worker is high, thus they gain more from capital deepening.

Answer 7

False, they gain less from capital deepening

Question 8

True or False
Natural resources are essential to economic growth and their ownership is necessary.

Answer 8

False
Natural resources are essential to economic growth and their ownership is not necessary.

Question 9

What is classical growth theory?

Answer 9

Growth in real GDP per capita is temporary. It is mean reverting due to population.

Question 10

What is neo classical growth theory?

Answer 10

Growth rate of GDP function depends on-
a) Population growth
b) Labour share of income
c) rate of technology
Population growth is independent of economic growth
Capital deepening affects the level of output but not the growth rate in the long run.

Question 11

What is endogenous growth theory?

Answer 11

Investment in R&D is important to advancement of technology thus increase in growth of output. this assumption allows for permanent increase in growth rate attributable to increase in saving rate.
Open markets lead to higher rate of growth permanently for all markets.

Question 12

What is absolute convergence hypothesis?

Answer 12

Standard of living of less developed will be one day equal to developed countries.

Question 13

What is conditional convergence hypothesis?

Answer 13

Convergence will occur only if countries have-
a) Same saving rate
b) same population growth
c) Same production function

Question 14

What is club convergence hypothesis?

Answer 14

Countries in same club i.e. similar institutional structure will converge.

Question 15

True or False
Convergence of living standard is quicker in closed economy.

Answer 15

False,
Convergence of living standard is quicker in open economy.

Question 16

What is the dilution effect of change in stock?

Answer 16

The dilution effect is comprised of net stock buybacks (nbb) as well as issuance by privately held companies. We call the role of these small and medium entrepreneurial companies the relative dynamism (rd) of the economy.
Therefore, ΔS = nbb + rd
Relative dynamism captures the difference between the overall economic growth of the country and the earnings growth of listed companies.

Question 17

True or False
Capital deepening is a shift in the productivity curve. Technological progress is the movement along the productivity curve.

Answer 17

False
Capital deepening is a movement along the productivity curve. Technological progress shifts the productivity curve

Question 18

What is the Dutch Disease?

Answer 18

Dutch disease refers to a situation where global demand for a country’s natural resources drives up the country’s currency values, making all exports more expensive and rendering other domestic industries uncompetitive in the global markets.

Question 19

True or False
In the steady state, marginal product of capital (MPK) = αY/K is constant, but marginal productivity is diminishing.

Answer 19

True
Developing countries (with a lower level of capital per worker) will be impacted less by diminishing marginal productivity of capital, and hence have higher growth rates as compared to developed countries.

Question 20

True or False
Knowledge capital is a special type of public good that is not subject to the law of diminishing returns

Answer 20

True

Question 21

What is informational friction?

Answer 21

When information is not equally available or distributed
a) Adverse selection - Insider trading
b) moral Hazard

Question 22

What are the tyes of regulators?

Answer 22

a) Government regulators - politically dependant
b) Independent regulators - politically independent. included SRO

Question 23

What are the types of Self Regulatory Organisation?

Answer 23

a) Independent SRO - right to frame law, politically independent
b) Not independent - No power to frame law, politically independent.

Question 24

use of SRO is more prevalent in -
a) common law
b) civil law

Answer 24

Common law

Question 25

What is capture regulation?

Answer 25

Based on assumption that regulatory body is influenced or controlled by the industry that is being regulated.

Question 26

What is regulatory burden?

Answer 26

Government burden is the cost of compliance for the regulated entity.
Net regulatory burden = Regulatory burden - private benefit of regulation
it is difficult to measure due to indirect cost.

Question 27

What is sunset clause?

Answer 27

To revisit the cost benefit analysis base on actual outcome before renewing the regulation.

Question 28

True or False
Regulatory capture is more likely to be a concern with government agencies than SROs.

Answer 28

False
Regulatory capture is more likely to be a concern with SROs than with government agencies

Question 29

True or False
SROs and outside bodies are least likely to use price mechanisms

Answer 29

True

Question 30

What is the coarse theorem?

Answer 30

It states that if an externality can be traded and there are no transaction cost, then the allocation on property rights will be efficient and the resource allocation will not depend on the initial assignment of property rights.

Question 31

What is the basic rule for currency cross rate?

Answer 31

Up the bid and multiply, down the ask and divide.

Question 32

What is the difference between covered and uncovered interest rate parity?

Answer 32

In covered, no arbitrage is possible but in uncovered, arbitrage is possible.

Question 33

What is International FIscher Relationship?

Answer 33

Difference in interest rate of two countries is equal to nominal rate difference of two countries.
It assumes real interest rate is same for both countries.

Question 34

What is purchase parity theory?

Answer 34

Assumes fischer relation holds and are of 3 types-
a) Absolute
b) Relative
c) Ex ante

Question 35

What is forward rate parity?

Answer 35

It states that covered=uncovered
Forward rate=Expected Rate
If uncovered holds, covered answer is same as uncovered and forward parity holds.

Question 36

What is Carry trade?

Answer 36

In carry trade, investor invests in high yielding currency and borrow in low yielding currency. If depreciation in short term is not equal to difference in interest rate then investor makes profit. It states failure of uncovered interest rate parity.

Question 37

What is crash risk?

Answer 37

Return distribution is negatively skewed and excess kurtosis due to which there is high probability of large loss in carry trade.

Question 38

What happens to currency in -
a) Current account deficit
b) Current account surplus

Answer 38

a) Import>Export, this implies demand for foreign currency is high. Thus local currency depreciates.
b) Import<Export, this implies demand for local currency is high. Thus local currency appreciates.

Question 39

What is Mundell Fleming Model?

Answer 39

Evaluates short term impact of monetary and fiscal policy. Assumes inflation does not play any role.
a) Flexible exchange rate
b) Fixed exchange rate

Question 40

What happens to currency in case of expansionary policy in-
a) Flexible rate high capital mobility
b) Flexible rate low capital mobility
c) Fixed exchange rate

Answer 40

a) In monetary policy - Leads to decrease in interest rate, due to which foreign capital inflow decreases, hence currency depreciates. In fiscal policy - Leads to increase in government spending, hence borrowing rate increases leading to increase in interest rate which implies more foreign capital, hence appreciation.
b) Fiscal or monetary policy - leads to increase in net imports thus depreciation.
c) Government purchases its own currency in market leading to depreciation.

Question 41

What are monetary models in currency exchange rate?

Answer 41

Assumes output is constant and inflation plays the major role.
a) Pure Monetary model
b) Dornbusch Overshooting model

Question 42

What happens to currency in case of expansionary policy in-
a) Pure monetary model
b) Dornbusch overshooting model

Answer 42

a) Assumes PPP holds and output is constant.
Thus, In expansionary monetary policy, it leads to increase in prices and decrease in value if domestic currency hence depreciation.
b) Assumes PPP does not hold in short term but in long term it becomes mean reverting.
In expansionary monetary policy, interest rate decreases due to which currency depreciates more than PPP implied but in long term it comes back to PPP.

Question 43

Which country interest rate is taken while computing value of forward contract?

Answer 43

Price currency

Question 44

True or False
Even if the law of one price held for every good in two economies, absolute PPP might not hold.

Answer 44

True
Even if the law of one price held for every good in two economies, absolute PPP might not hold because the weights (consumption patterns) of the various goods in the two economies may not be the same.

Question 45

True or False
Evidence has shown that for developed markets, central banks are relatively effective at intervening in the foreign exchange markets due to lack of sufficient resources

Answer 45

False,
They are ineffective.