Economics Flashcards
What is the formula for calculating the forward rate under uncovered interest rate parity?
F = S x (1+(Rp-Rb))
What will be the effect of high interest rates under the international parity relationship theory?
A high interest rate will be offset by depreciation, so excess cannot be earned by investing in foreign currencies.
What does the flow mechanism theory say will happen as a result of a current account deficit?
That a current account deficit will lead to local currency depreciation.
What does capital account theory say will happen as a result of a current account deficit?
That a current account deficit will lead to capital inflows and local currency appreciation.
What does portfolio compensation theory say?
That investors will rebalance their portfolio if they have accumulated too much of a currency.
What is the PPP theory of exchange rates?
That countries with higher inflation will depreciate relative to countries with low inflation.
What is the calculation for forward spread if given:
a) Spot Bid
b) Spot Ask
c) Bid Spread
d) Ask Spread
Forward Spread = (Spot Bid - Bid Spread) - (Spot Ask - Ask Spread)
How do you calculate all in rate given the spot rate and a spread?
All In = Spot - Spread/10,000
What skewness and kurtosis do carry trades have?
Negative skewness and excess kurtosis.
What is the relationship between long-term stock market growth and long-term GDP growth?
Long-term stock market growth is limited to long-term GDP growth.
What is the formula for Real GDP under the total factor productivity model?
Real GDP = △TFP + wL(△L) + wC(△C)
What is the formula for output growth under neoclassical theory?
Output Growth = Productivity Growth / (1-Elasticity of Capital) + Population Growth
Which theory supports the idea that R&D may have growth benefits and should therefore be subsidised by the government?
Endogenous Growth Theory.
What is the classical growth theory?
Classical growth theory says that growth in real GDP is temporary, and that when GDP per capita rises above subsistence level there is a population explosion, and GDP per capita is then driven back to subsistence.
What is neoclassical growth theory?
Neoclassical growth theory says that sustainable GDP growth is a function of population growth, labor’s share of income, and the rate of technological advance.
What is the real interest rate parity condition?
It is the theory that real interest rates will converge to the same level across all markets.
Who issues statute laws?
Legislative bodies.
Who issues administrative regulations?
Government agencies or authorised bodies.
What is regulatory capture?
Where a regulator is influenced or controlled by the industry which it is regulating.
What are the two forms of regulatory arbitrage?
- Exploiting the difference between the substance and the interpretation of the law.
- Moving operations to a region with less strict regulations.
What is regulatory competition?
Where regions compete to be the most business-friendly.
Which theory says that capital accumulation affects the level of output but not the long-run growth rate?
Neoclassical theory.
When the market is in equilibrium, what is the formula for rental capital/ marginal cost of capital?
MCC = k x Current GDP / Capital Base
Does the asset market model approach focus on fiscal or monetary policy?
Fiscal policy.
What does relative purchasing power parity say?
That future exchange rates are driven by inflation.
What does the international fisher relationship say?
That inflation differential is driven by interest rate differential.
What conditions must hold for uncovered interest parity to hold?
Relative purchasing power parity and the international fisher relationship.
What does absolute PPP say, and is it used to estimate exchange rates?
Absolute PPP says that the price of a good should not differ in different countries. It is not used to estimate exchange rates.
Can an individual broker change the bid/ask spread of a currency?
No.
What is the relationship between government spending and exchange rate?
High government spending = High Interest Rates = High Exchange Rates
What are the three factors affecting the impact of a current account deficit on local currency?
- Size of local currency.
- Influence of exchange rates on domestic prices of internationally traded goods.
- Elasticity of exports and imports.
What is the definition of hyperinflaton?
3-year cumulative inflation of 100%.
What is the formula for inflation, given the real interest rate and nominal interest rate?
Inflation = 1 + Nominal / 1 + Real
