W8

Question 1

Sovereign Wealth Funds (SWFs) main goals

Answer 1

Long-term equity (i.e., future generations): Policies focused on long-term equity aim to ensure that future generations have equal opportunities and access to resources
Short-term stabilization (recessions/expansions): Policies focused on short-term stabilization aim to manage economic fluctuations

Question 2

Explain knock-on economic effects of dutch disease

Answer 2

Dutch discovery of natural gas. Higher wages locally make the economy uncompetitive. In economics jargon, real exchange rate appreciated - exports dearer. Many sectors disappear because products being sold at an expensive rate - can’t keep up

Question 2

The Dutch disease

Answer 2

The Dutch disease refers to the possibility that a country loses competitiveness when proceeds from natural resources are invested inside the country.

Question 3

Solution to ducth disease

Answer 3

Solution: invest money outside country - that’s what Norway did

Question 4

Exchange rate cannot appreciate if held fixed against the US dollar (Gulf Co-operation Countries, GCC) or if part of the eurozone. * Where is the fallacy?

Answer 4

Distinction between real and nominal exchange rates.. Even if the nominal exchange rate is fixed, rising domestic prices due to increased demand and investment can lead to higher inflation. This causes the real exchange rate to appreciate, making domestic goods and services more expensive relative to foreign ones and potentially reducing the economy’s international competitiveness

Question 5

Fiscal rule

Answer 5

A fiscal rule places a constraint on how much can be withdrawn from the Sovereign Wealth Fund (SWF) to preserve resources for future generations. This affects asset allocation because if withdrawals are limited, the higher accumulated wealth influences investment strategies. Similar issues arise with university endowments, where restrictions on spending impact how assets are allocated.