Economics

Question 1

Growth Accounting Equation

Answer 1

States that the growth rate of output equals the rate of technological change plus alpha times the growth rate of capital plus (1-alpha) times the growth rate of labor.

Question 2

Labor Force

Answer 2

The working age population (ages 16 to 64) that is either employed or available for work but not working.

Question 3

Labor Force Participation Rate

Answer 3

The percentage of the working age population in the labor force.

Question 4

Human Capital

Answer 4

The accumulated knowledge and skills that workers acquire from education, training, or life experience.

Question 5

Carry Trade

Answer 5

Entails going long a high yielding investment and going short a low yielding investment.

Question 6

Exchange Rate

Answer 6

The price of the base currency expressed in terms of the price currency.

USD/EUR = the EUR is the base currency and costs X USD to buy

Question 7

Ex Ante Purchasing Power Parity

Answer 7

Countries that are expected to run persistently high inflation rates should expect to see their currencies depreciate over time, while countries that are expected to run relatively low inflation rates on a sustainable basis should expect to see their currencies appreciate over time.

Question 8

Real Interest Rate Parity

Answer 8

The proposition that real interest rates will converge to the same level across different markets.

Question 9

The International Fisher Effect

Answer 9

If real interest rates are equal across markets, then it also follows that the foreign-domestic nominal yield spread will be solely determined by the foreign-domestic expected inflation differential.

Question 10

Macroeconomic Balance Approach

Answer 10

Estimates how much exchange rates need to adjust in order to close the gap between the medium-term expectation for a country’s current account imbalance and that country’s normal (or sustainable) current account imbalance.

Question 11

External Sustainable Approach

Answer 11

Differs from the macroeconomic balance approach by focusing on stocks of outstanding assets or debt rather than on current account flows. Calculates how much exchange rates would need to adjust to ensure that a country’s net foreign-asset/GDP ratio or net foreign-liability/GDP ratio stabilizes at some benchmark level.

Question 12

Reduced-Form Econometric Model

Answer 12

Seeks to estimate the equilibrium path that a currency should take in the basis of the trends in several key macroeconomic variables, such as a country’s net foreign asset position, it’s terms of trade, and it’s relative productivity.

Question 13

Uncovered Interest Parity

Answer 13

The concept that exchange rates must change so that the return on investments with identical risk will be the same in any currency. High-yield currencies are expected to depreciate in value, while low-yield currencies are expected to appreciate in value.

Question 14

FX Carry Trade

Answer 14

Involves taking on long positions in high-yield currencies and short positions in low-yield currencies.

Question 15

The Mundell-Fleming Model

Answer 15

Describes how changes in monetary and fiscal policy affect the level of interest rates and economic activity within a country, which in turn leads to changes in the direction and magnitude of trade and capital flows and ultimately to changes in the exchange rate.

Question 16

Quantity Theory of Money

Answer 16

Money supply changes are the primary determinant of price level changes. An X percent rise in the domestic money supply will produce an X percent rise in the domestic price level.

Question 17

Unsterilized Intervention

Answer 17

Expanding the monetary base and encouraging short-term interest rates to move lower, only in a situation when there is no inflation threat.

Question 18

Sterilized Intervention

Answer 18

EM authorities would sell domestic securities to the private sector to mop up any excess liquidity created by its FX intervention activities, only in a situation when inflation is a concern.

Question 19

Classical Growth Theory

Answer 19

Developed by Thomas Malthus in 1798, is focused on the impact of a growing population in a world with limited resources. The key assumption is that population growth accelerates when the level of per capita income rises above the subsistence income, which is the minimum income needed to maintain life.

Question 20

Neoclassical Theory of Growth

Answer 20

Devised by Robert Solow in the 1950s, to determine the long-run growth rate of output per capita and relate it to the savings/investment rate, the rate of technological change and population change.

Question 21

Endogenous Growth Theory

Answer 21

Focus on explaining technological progress rather than treating it as exogenous. Self-sustaining growth emerges as a natural consequence of the model and the economy does not necessarily converge to a steady state of growth.

Question 22

Absolute Convergence

Answer 22

Developing countries, regardless of their particular characteristics, will eventually catch up with the developed countries and match them in per capita output.

Question 23

Conditional Convergence

Answer 23

Convergence is conditional on the countries having the same saving rate, population growth rate, and production function.

Question 24

Club Convergence

Answer 24

Only the rich and middle-income countries that are members of the club are converging to the income level of the richest countries in the world. Poor countries can join the club if they make the appropriate institutional changes.

Question 25

Prudential Supervision

Answer 25

Regulation and monitoring of the safety and soundness of financial institutions in order to promote financial stability, reduce system-wide risks, and protect customers of financial institutions.

Question 26

Dutch Disease

Answer 26

Refers to a situation where a country with large endowments of natural resources find it’s currency appreciating driven by foreign demand for those natural resources. It may cause the country to be uncompetitive in other industries because all resources are devoted to the one industry.

Question 27

External Sustainability Approach

Answer 27

The assessment of sustainable levels of debt relative to GDP.

Question 28

Share the gains, share the pains theory

Answer 28

The pains and gains of regulation would be shared equally among the industry and consumer.

Question 29

Capture Hypothesis

Answer 29

The regulatory decisions tend to favor the industry because of the close relationship between the industry and the regulator. The fact that regulatory bodies tend to have members who used to work in the industry.

Question 30

Foreign Exchange Expectation Relation

Answer 30

The forward rate is an unbiased predictor of the expected future spot rate. If this is the case, uncovered interest rate parity would be the same as covered interest parity and since covered interest rate parity holds, uncovered interest rate parity would also hold.