Economics

Question 1

The Bid-Offer Spread depends on (5)

Answer 1

The Bid-Offer spread depends on: 1) the currency pair involved, 2) the time of day, 3) market volatility, 4) the transaction size, 5) the relationship between the dealer and the client

Question 2

Forward Rate: Ff/d =

Answer 2

Forward Rate: F_(f/d)=S_(f/d) ((1+i_f (Actual/360))/(1+i_d (Actual/360) ))

Question 3

The Mondell-Fleming Model: Determination of Exchange Rates under conditions of high capital modbility

Answer 3

The Mondell-Fleming Model: Determination of Exchange rates under conditions of high capital mobility
Expansionary Monetary Policy Restrictive Monetary Policy
Expansionary Fiscal Policy Ambiguous Domestic Currency Appreciates
Restrictive Fiscal Policy Domestic Currency Depreciates Ambiguous

Question 4

Forward Premium/Discount:

Answer 4

Forward Premium/Discount: F_(f/d)- S_(f/d) =S_(f/d) ([Actual/360]/(1+i_d [Actual/360] ))(i_f-i_d )

Question 5

Triangular Arbitrage: Given – interbank bid/offer: A/B, C/B; dealer bid/offer: A/C

Answer 5

Triangular Arbitrage: Given – interbank bid/offer: A/B, C/B; dealer bid/offer: A/C
Find – implied A/C
B/C = 1/Offer / 1/Bid
Implied A/C = A/B Bid* B/C Bid / A/B Offer* B/C Offer
Dealer: Bid / Offer
Implied: Bid / Offer
Buy low, sell high; buy at lowest offer and sell at highest bid
(bid (offer): rate at which they are willing to buy (sell))
Profit = Highest Bid – Lowest Offer

Question 6

Relative Version of Purchasing Power Parity

Answer 6

Relative Version of PPP (Purchasing Power Parity) – changes in (nominal) exchange rates over time are equal to national inflation rate differentials: %ΔSf/d ≈ πf – πd where π – inflation

Question 7

International Fisher Effect

Answer 7

International Fisher Effect – proposition that nominal interest rate differentials across currencies are determined by expected inflation differentials: i_f-i_d=π_f^e-π_d^e and r=i- π^e where r – real interest rate, i – nominal interest rate, π – inflation

Question 8

The Mondell-Fleming model, determination of exchange rates under conditions of low capital mobility

Answer 8

The Mondell-Fleming model, determination of exchange rates under conditions of low capital mobility:
Expansionary Monetary Policy Restrictive Monetary Policy
Expansionary Fiscal Policy Domestic Currency Depreciates Ambiguous
Restrictive Fiscal Policy Ambiguous Domestic Currency Appreciates

Question 9

Taylor Rule

Answer 9

Taylor Rule: i= r_n+π+α(π-π^* )+β(y-y^) where i – Taylor rule prescribed central bank policy rate, rn – neutral real policy rate, π – current inflation rate, π - central bank’s target inflation rate, y – log of current level of output, y* - log of economy’s potential/sustainable level of output

Question 10

Factors limiting growth (8)

Answer 10

Factors limiting growth include: low rates of saving and investment, poorly developed financial markets (or not competitive), weak or even corrupt legal systems and failure to enforce laws, lack of property rights and political instability, poor public education and health services, tax and regulatory policies discouraging entrepreneurship, restrictions on international trade and flows of capital

Question 11

Classical Model

Answer 11

Classical Model – growth in per capita income is only temporary because of increasing population and limited resources

Question 12

Neoclassical Model

Answer 12

Neoclassical model – the economy converges to a steady state because of diminishing marginal returns to capital; no permanent increase in rate of economic growth

Question 13

Endogenous Growth Theory

Answer 13

Endogenous Growth Theory – the economy does not converge to a steady state of growth because allows possibility of constant or increasing returns to capital; permanent increase in rate of economic growth

Question 14

Steady State

Answer 14

Steady State: ΔY/Y = ΔK/K = (ΔA/A)/(1-α)

Question 15

Growth Rate of Output =

Answer 15

Growth Rate of Output = θ/(1-α) + n = ΔY/Y where θ – growth rate of TFP, n – growth rate of labour, α – output elasticity of capital

Question 16

Solow Growth Accounting Equation

Answer 16

Solow Growth Accounting Equation: ΔY/Y = ΔA/A + α ΔK/K + (1-α) ΔL/L where Y – GDP, A – TFP (total factor productivity), K – capital, L – labor, α – output elasticity of capital

Question 17

Absolute Convergence

Answer 17

Absolute Convergence – the idea that developing countries, regardless of their particular characteristics, will eventually catch up with the developed countries and match them in per capita output

Question 18

Conditional Convergence

Answer 18

Conditional Convergence – the idea that convergence of per capita income is conditional on the countries having the same savings, rate, population growth rate, and production function

Question 19

Club Convergence

Answer 19

Club Convergence – the idea that only rich and middle-income countries sharing a set of favourable attributes will converge to the income level of the richest countries

Question 20

Regulations can be classified as…

Answer 20

Regulations can be classified as reflecting laws enacted by legislative bodies (statutes), rules issued by government agencies or other regulators (administrative regulations or administrative laws), and interpretations of courts (judicial law)