Week 6

Question 1

What is industry-specific risk

Answer 1

Industries can be hit by a common shock

Question 2

What is industry-specific risk

Answer 2

Industries can be hit by a common shock

Question 3

What is country-specific risk?

Answer 3

Countries can be hit by adverse shocks which affect all firms/industries within a country at the same time

Question 4

Why does capital not flow to poor countries? (3)

Answer 4

1. marginal returns on capital may be non-decreasing
2. differences in taxes, property rights protection, corruption, other institutional factors.
3. capital markets are not full integrated

Question 5

What is Marginal product of capital

Answer 5

MPK indicates how much additional output can be produced with an additional unit of physical capital holding all other production factors constant.

Question 6

What are exchange controls

Answer 6

Impose restrictions on quantity of foregin exchange

• all foreign exchange is done via a public authority
• foreign currency must be sold at a specific rate
• government allocates rights to buy foreign currency

reduces welfare

Question 7

How to prevent depreciation?

How to prevent appreciation?

Answer 7

Dep: buy domestic, sell foreign
App: sell domestic, buy foreign

Question 8

What is permanent peg, adjustable peg and crawling peg?

Answer 8

1. fix “forever”
2. Fix for a long time but allow for occasional adjustments
3. Adjust band frequently in line with economic indicators

Question 9

What is a dirty/managed float?

Answer 9

flexible exchange rate with some interventions of the government to influence market rate

Question 10

What are effects of high value of the currency (appreciation)

Answer 10

It hurts exporting and import-competing businesses, but lowers import prices, reducing domestic inflation

Question 11

What are the effects of a low value of currency (depreciation)

Answer 11

It benefits exporting frims and import-competing firms, but increases import prices, causing domestic inflation