Economics

Question 1

Dutch disease

Answer 1

currency appreciation driven by strong export demand for resources makes other segments of the economy, in particular manufacturing, globally uncompetitive

Question 2

Neoclassic model

Answer 2

Sustainable growth rate of an economy is a function of population growth, labor share of income, and rate of technological advancement. Growth from savings is temporary

Question 3

Endogenous model

Answer 3

• no diminishing marginal returns to capital for the economy as a whole
• increasing the saving rate permanently increases the rate of economic growth
  -production function = y(e) = f(k(e)) = c*k(e), where y(e) is output per worker, k(e) = capital per worker, c is constant
• growth rate of output per capita = delta y(e) = delta k(e) = s*c-o-n, where s is savings rate, c is constant, o is depreciation, n = labor force growth

Question 4

capital-labor ratio

Answer 4

an increase in the capital-labor ratio, moving along the production function to the right

Question 5

capital deepening

Answer 5

adding more and more capital to a fixed number of workers increase per capita output, but at a decreasing rate

Question 6

effect of capital deepening on country with high capital-labor ratio and low marginal product of capital

Answer 6

little impact because of diminishing returns

Question 7

effect of population growth on gdp growth and per capita gdp growth

Answer 7

increases gdp growth, but no effect on per capita gdp growth

Question 8

a country with high capital-labor ratio and low marginal product of capital will increase growth in gdp per capita through what?

Answer 8

technological progress

Question 9

indicators of dutch disease

Answer 9

high export demand for natural resources and high currency appreciation

Question 10

The key international parity conditions

Answer 10

1) Covered interest rate parity
2) Uncovered interest rate parity
3) Forward rate parity
4 Purchasing power parity
5) International fisher effect

Question 11

Covered interest rate parity

Answer 11

Investment in a foreign money market instrument that is completely hedge against exchange rate risk should yield exactly the same return as an otherwise identical domestic money market instrument

If the forward and spot exchange rates, as well as one of the risk-free rates are known, the other risk-free rate can be calculated

Question 12

Uncovered interest rate parity

Answer 12

The proposition that the expected return on an uncovered (unhedged) foreign currency (risk-free) investment should equal the return on a comparable domestic currency investment

Given the spot exchange rate and the expected future change, the future spot exchange rate can be calculated

Question 13

Forward Rate Parity

Answer 13

Forward exchange rate will be an unbiased predictor of the future spot exchange rate

Not a perfect forecast, just an unbiased one

Question 14

Why uncovered interest rate parity prediction will not hold

Answer 14

there is no arbitrage condition that forces uncovered interest rate parity to hold

Question 15

Using forward points to forecast exchange spot rate assumes what about investors

Answer 15

they are risk neutral

Question 16

Purchasing power parity (PPP)

Answer 16

Exchange rates move to equalize the purchasing power of different currencies

Question 17

Absolute version of PPP

Answer 17

prices of goods and services will not differ internationally once exchange rates are considered

Question 18

Relative version of PPP

Answer 18

changes in nominal exchange rates over time are equal to national inflation rate differentials

Question 19

Real interest rate parity

Answer 19

Real interest rates will converge to the same level across different markets

Question 20

International fisher effect

Answer 20

nominal interest rate differentials across currencies are determined by expected inflation differentials

Question 21

Forward rates are unbiased predictors of future spot rates if which two parity conditions hold

Answer 21

Covered interest rate parity and uncovered interest rate parity

Question 22

International fisher effect requires which parities to hold

Answer 22

ex ante PPP and real interest rate PPP

Question 23

FX carry trade

Answer 23

Investment strategy that involves taking long positions in high-yield currencies and short positions in low-yield currencies

Question 24

Carry trades will be profitable when which parity does not hold

Answer 24

uncovered interest rate parity, in the short or medium term

Question 25

Three accounts that make up country's balance of payments

Answer 25

Current, capital and financial account

Question 26

Impact of exports>imports on current account and capital account

Answer 26

Negative current account and current account deficit, must make it up with a surplus in capital account

Question 27

Impact of long-term current account deficit on currency

Answer 27

Currency will depreciate because that country is financing their acquisitions of imports through the continued use of debt

Question 28

Why do investment/financing decisions usually dominant exchange rate movements

Answer 28

1) Prices tend to adjust slowly than exchange rates 2) Product of real goods and services takes time, while liquid financial markets allow virtually instant redirection of financial flows 3) Current spending/production reflects purchases and sales of current production while investment/financing decisions reflect reallocation of existing portfolios 4) Expected exchange rate movements can induce very large short-term capital flows.

Question 29

Impact on domestic currency | Expansionary monetary policy + expansionary fiscal policy with low capital mobility

Answer 29

domestic currency depreciates

Question 30

Impact on domestic currency | restrictive monetary policy + expansionary fiscal policy with low capital mobility

Answer 30

indeterminate

Question 30

Impact on domestic currency | Expansionary monetary policy + restrictive fiscal policy with low capital mobility

Answer 30

indeterminate

Question 31

Impact on domestic currency | restrictive monetary policy + restrictive fiscal policy with low capital mobility

Answer 31

appreciates

Question 32

Potential GDP

Answer 32

the maximum amount of output an economy can sustainably produce without inducing an increase in the inflation rate output level that corresponds to full employment with consistent wage and price expectations

Question 33

Grinold-Kroner Model

Answer 33

E(r) = dividend yield + expected repricing + inflation rate + real economic growth - change in shares outstanding

Question 34

Classical growth theory - economics

Answer 34

in the long run, the adoption of new technology results in a larger but not richer population, thus the standard of living is constant over time and there is no growth in per capita output

Question 35

Increase in the savings rate under neoclassical model

Answer 35

implies higher capital-to-labor ratio (k) and higher output per worker (y) because a higher saving rate generates more saving/investment at every level of output

Question 36

Increase in labor force growth (n) under neoclassical model

Answer 36

reduces equilibrium capital-to-labor

Question 37

increase in Deprecation rate (o) under neoclassical model

Answer 37

reduces equilibrium capital-to-labor

Question 38

Why are emerging market countries better able to influence their exchange rates

Answer 38

Their reserve levels as a ratio of average daily FX turnover are generally much greater than those of DM countries

Question 39

What happens to foreign exchange reserves during currency crises

Answer 39

they decline

Question 40

What happens to broad money growth during currency crises

Answer 40

they increase

Question 41

Behavior of trade balance right before a currency crises

Answer 41

no change

Question 42

Impact on domestic currency | expansionary fiscal policy | restrictive monetary policy with high capital mobility

Answer 42

currency appreciation

Question 43

impact on domestic currency | expansionary monetary policy | restrictive fiscal policy with high capital mobility

Answer 43

currency depreciation

Question 44

impact on domestic currency | expansionary monetary policy | expansionary fiscal policy with high capital mobility

Answer 44

ambiguous

Question 45

impact on domestic currency | restrictive monetary policy | restrictive fiscal policy with high capital mobility

Answer 45

ambiguous

Question 46

Relative to a normal distribution, the distribution of carry trade returns are more

Answer 46

peaked with negative skew

Question 47

Are forward rates good predictors of forward spot rates

Answer 47

no

Question 48

Under what time frame do international parity conditions hold

Answer 48

medium-to-long-term

Question 49

Under what time frame do international parity conditions not hold

Answer 49

short-medium term

Question 50

Formula under UIRP

Answer 50

inflation(foreign) - inflation(domestic)

Question 51

which key determinant of exchange rates is absent in the Mundell-Fleming model

Answer 51

inflation rates

Question 52

What two conditions must hold for real interest rate parity to hold

Answer 52

UIRP and ex ante PPP

Question 53

Under UIRP, country with higher rates, what happens to their currency

Answer 53

depreciates

Question 54

Formula for pure capital deepening

Answer 54

Growth in labor productivity - growth in TFP the larger the difference, the more important capital deepening is as a source of growth

Question 55

Most important factor in long-term stock market growth

Answer 55

Growth in GDP

Question 56

Club convergence

Answer 56

The idea that only rich and middle income countries sharing a favorable set of characteristics (part of the club) will converge to the income level of the richest countries The club includes institutional structures, property rights, political stability, etc.

Question 57

Absolute convergence

Answer 57

The idea that all countries will eventually converge to the same gdp per capita output

Question 58

Conditional convergence

Answer 58

The idea that countries will only catch the richest countries if they have the same savings rate, population growth rate, and production function

Question 59

Douglas-Cobb Function

Answer 59

Y(L,K) = AL^y * K^x Y - total production A - total factor productivity L - labor K - capital The premise is constant returns to scale, and does display diminishing returns to scale

Question 60

Regulatory Competition

Answer 60

When regulators compete to provide a more conducive environment for businesses

Question 61

Regulatory Capture

Answer 61

Regulation arises to enhance the interests of the regulated

Question 62

Independent Regulators

Answer 62

Regulators recognized and granted authority by the government. They are not part of the government and do not rely on government funding

Question 63

Self-regulating Bodies

Answer 63

Private, non-government bodies that both regulate and represent their members. Some SROs are also independent regulators

Question 64

Self-regulating organization

Answer 64

Self-regulating body given authority by the government

Question 65

Coase Theorem

Answer 65

If an externality can be traded and there are no transaction costs, then the allocation of property rights will be efficient

Question 66

Substantive Law vs. Procedural Law

Answer 66

Substantive focuses on the rights and responsibilities of entities and relationships of entities, while procedural focuses on the protection and enforcement of substantive laws

Question 67

GDP Growth Rate

Answer 67

1) Long-term growth rate of technology + (x * long-term growth rate in capital) + (1-x) * (long-term growth rate in capital) 2) Long-term growth rate of labor force + long-term growth rate in labor productivity

Question 68

Sustainable growth of output per capita under neoclassical model

Answer 68

Growth rate in technology / labor's share of GDP (1-a)

Question 69

Sustainable growth rate of output under neoclassical model

Answer 69

sustainable growth rate of output per capita + growth of labor

Question 70

Adverse Selection

Answer 70

When sellers have information that buyers do not

Question 71

The correlation between the ownership of natural resources and subsequent real GDP growth

Answer 71

insignificant, but not different from 0

Question 72

Growth due to TFP

Answer 72

growth from labor productivity - capital deepening