Economics

Question 1

Indirect exchange

Answer 1

Domestic currency = Base currency = Denominator

Question 2

Direct exchange

Answer 2

Domestic currency = Price currency = Numerator

Question 3

What is Covered interest rate parity

Answer 3

Covered interest rate parity holds when any forward premium or discount exactly offsets differences in interest rates, so that an investor would earn the same return investing in either currency

Question 4

Economics of Regulation: What is judicial law ?

Answer 4

Regulation enforced by the courts

Question 5

Economics of Regulation: What is administrative law ?

Answer 5

Regulation enforced/passed by independent regulatory bodies.

Question 6

Economics of Regulation: What is Statute ?

Answer 6

Laws enacted by legislative bodies

Question 7

Economics of Regulation: What is procedural law ?

Answer 7

Focuses on the rights and responsibilities among entities and the protection and enforcement of substantive law

Question 8

Economics of Regulation: What is Regulatory competition?

Answer 8

Regulators off a better environment for businesses to operate in.

Question 9

Economics of Regulation: What is Regulatory Arbitrage?

Answer 9

A practice whereby firms capitalize on loopholes in the regulatory system in order to circumvent unfavorable regulations.

Question 10

What are the two arbitrage constraints between Interbank market and dealer?

Answer 10

Dealers bid < Interbank offer

Dealers offer > Interbank bid

REMEMBER: Offer (sell) has to always be greater between dealer and bank.

Question 11

Absolute Purchasing Power Parity

Answer 11

Absolute Purchasing Power Parity (Absolute PPP) compares the average price of a representative basket of consumption goods between countries.

Question 12

Relative Purchasing Power Parity

Answer 12

Relative Purchasing Power Parity (Relative PPP) states that changes in exchange rates should exactly offset the price effects of any inflation differential between two countries. E.g.

If Country A has a 6% inflation rate and Country B has 4% inflation rate, then Country A’s currency should depreciate by approximately 2% relative to Country B’s currency over the period.

Question 13

Ex-Ante Purchasing Power Parity

Answer 13

Ex-Ante Purchasing Power Parity (Ex-Ante PPP) asserts that the expected changes in the spot exchange rate are entirely driven by expected differences in national inflation rates.

Question 14

Uncovered Interest rate parity: What will happen to a currency if the currency is low?

Answer 14

Appreciate

Question 15

Uncovered Interest rate parity: What will happen to a currency if the currency is High?

Answer 15

Depreciate

Question 16

Which parity looks at exchange rates and inflation rate differential?

Answer 16

PPP
Purchasing Power Parity

Question 17

Calculation for Real change in exchange rates

Answer 17

Δ%Sf/d + Δ%CPIf - Δ%CPId

Question 18

Formula for Expected change in spot rates

Answer 18

Δ%Sf/d = if - id

Question 19

Formula for real exchange rate

Answer 19

Sf/d x (CPI domestic / CPI Foreign)

Question 20

Formula for capital deepening

Answer 20

Growth in labor productivity - Growth in TFP

Question 21

Formula for future expected spot price under UIRP

Answer 21

Same as for Expected change in spot rates

Δ%Sf/d = if - id

Question 22

Formula for “growth accounting equation”

Answer 22

%ΔY = %ΔA + a x%ΔK + (1-a)%ΔL

A = TPF
a = Output elasticity