Economics

Question 1

What is the formula for calculating the forward rate under uncovered interest rate parity?

Answer 1

F = S x (1+(Rp-Rb))

Question 2

What will be the effect of high interest rates under the international parity relationship theory?

Answer 2

A high interest rate will be offset by depreciation, so excess cannot be earned by investing in foreign currencies.

Question 3

What does the flow mechanism theory say will happen as a result of a current account deficit?

Answer 3

That a current account deficit will lead to local currency depreciation.

Question 4

What does capital account theory say will happen as a result of a current account deficit?

Answer 4

That a current account deficit will lead to capital inflows and local currency appreciation.

Question 5

What does portfolio compensation theory say?

Answer 5

That investors will rebalance their portfolio if they have accumulated too much of a currency.

Question 6

What is the PPP theory of exchange rates?

Answer 6

That countries with higher inflation will depreciate relative to countries with low inflation.

Question 7

What is the calculation for forward spread if given:

a) Spot Bid
b) Spot Ask
c) Bid Spread
d) Ask Spread

Answer 7

Forward Spread = (Spot Bid - Bid Spread) - (Spot Ask - Ask Spread)

Question 8

How do you calculate all in rate given the spot rate and a spread?

Answer 8

All In = Spot - Spread/10,000

Question 9

What skewness and kurtosis do carry trades have?

Answer 9

Negative skewness and excess kurtosis.

Question 10

What is the relationship between long-term stock market growth and long-term GDP growth?

Answer 10

Long-term stock market growth is limited to long-term GDP growth.

Question 11

What is the formula for Real GDP under the total factor productivity model?

Answer 11

Real GDP = △TFP + wL(△L) + wC(△C)

Question 12

What is the formula for output growth under neoclassical theory?

Answer 12

Output Growth = Productivity Growth / (1-Elasticity of Capital) + Population Growth

Question 13

Which theory supports the idea that R&D may have growth benefits and should therefore be subsidised by the government?

Answer 13

Endogenous Growth Theory.

Question 14

What is the classical growth theory?

Answer 14

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.

Question 15

What is neoclassical growth theory?

Answer 15

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.

Question 16

What is the real interest rate parity condition?

Answer 16

It is the theory that real interest rates will converge to the same level across all markets.

Question 17

Who issues statute laws?

Answer 17

Legislative bodies.

Question 18

Who issues administrative regulations?

Answer 18

Government agencies or authorised bodies.

Question 19

What is regulatory capture?

Answer 19

Where a regulator is influenced or controlled by the industry which it is regulating.

Question 20

What are the two forms of regulatory arbitrage?

Answer 20

1. Exploiting the difference between the substance and the interpretation of the law.
2. Moving operations to a region with less strict regulations.

Question 21

What is regulatory competition?

Answer 21

Where regions compete to be the most business-friendly.

Question 22

Which theory says that capital accumulation affects the level of output but not the long-run growth rate?

Answer 22

Neoclassical theory.

Question 23

When the market is in equilibrium, what is the formula for rental capital/ marginal cost of capital?

Answer 23

MCC = k x Current GDP / Capital Base

Question 24

Does the asset market model approach focus on fiscal or monetary policy?

Answer 24

Fiscal policy.

Question 25

What does relative purchasing power parity say?

Answer 25

That future exchange rates are driven by inflation.

Question 26

What does the international fisher relationship say?

Answer 26

That inflation differential is driven by interest rate differential.

Question 27

What conditions must hold for uncovered interest parity to hold?

Answer 27

Relative purchasing power parity and the international fisher relationship.

Question 28

What does absolute PPP say, and is it used to estimate exchange rates?

Answer 28

Absolute PPP says that the price of a good should not differ in different countries. It is not used to estimate exchange rates.

Question 29

Can an individual broker change the bid/ask spread of a currency?

Answer 29

No.

Question 30

What is the relationship between government spending and exchange rate?

Answer 30

High government spending = High Interest Rates = High Exchange Rates

Question 31

What are the three factors affecting the impact of a current account deficit on local currency?

Answer 31

1. Size of local currency.
2. Influence of exchange rates on domestic prices of internationally traded goods.
3. Elasticity of exports and imports.

Question 32

What is the definition of hyperinflaton?

Answer 32

3-year cumulative inflation of 100%.

Question 33

What is the formula for inflation, given the real interest rate and nominal interest rate?

Answer 33

Inflation = 1 + Nominal / 1 + Real