Econ

Question 1

Define convergence.

Answer 1

Convergence means that countries with low per capita incomes should grow at a faster rate than countries with high per capita incomes until, over time, per capita income differences will be eliminated.

Question 2

Explain how investments in human capital affect economic growth.

Question 3

Forecast potential GDP based on growth accounting relations.

Answer 3

Question 4

Explain the portfolio balance channel.

Question 5

Describe factors favoring economic growth in developing countries.

Answer 5

Limited regulations and low administrative start-up costs encourage entrepreneurial activity and the entry of new companies.

Question 6

Describe the carry trade and its relation to uncovered interest rate parity.

Answer 6

An FX carry trade involves borrowing in low-yield currencies (also known as funding currencies) and shorting the currency in favor of higher-yield currencies in which investment are made.

Question 7

Describe uses of self-regulation in financial markets.

Answer 7

An SRO may have binding regulatory authority or merely possess the agreement of its members to abide by certain rules.

Question 8

Identify a triangular arbitrage opportunity and calculate its profit, given the bid-offer quotations for three currencies.

Answer 8

Question 9

Describe equilibrium in the Solow model.

Question 10

Identify underlying causes of currency crises.

Question 11

Identify the factors that affect the magnitude of the exchange rate adjustment required to remove the initial current account imbalance.

Question 12

Identify factors limiting economic growth in developing countries.

Answer 12

Lower savings and investment restrict capital formation.

Lack of respect for property rights (including intellectual property), ineffective government protection of such rights, and undeveloped legal and regulatory systems to address grievances.

Highly educated individuals emigrate abroad for greater economic opportunity.

Question 13

Explain the impact of capital mobility on government intervention programs.

Answer 13

A restrictive (expansionary) monetary policy under floating exchange rates will result in appreciation (depreciation) of the domestic currency. Fiscal polices under flexible exchange rates go the opposite way (i.e., restrictive policies result in depreciation).

If monetary and fiscal policies are both restrictive or both expansionary, the overall impact on the exchange rate will be unclear.

Question 14

Describe the debt sustainability channel.

Answer 14

Countries that run large, persistent current account deficits finance these deficits by borrowing from their trade partners (resulting in capital account surpluses). This may not be sustainable as net exporters change their desire to hold the importer’s debt.

Question 15

Evaluate how a specific regulation affects an industry, company, or security.

Answer 15

In addition to compliance costs, an even more significant burden relates to how regulation changes the economic decision-making process, alters behavior, and changes market allocations to various companies.

Regulations are usually more likely to benefit the regulated if regulators are “captive” to the industries they regulate (i.e., high exit costs).

Question 16

Explain the rule for determining the bid quote on the desired (base) currency when cross currencies are both quoted against the base.

Answer 16

Question 17

Distinguish between forward and spot rates.

Question 18

Explain purposes in regulating commerce.

Question 19

Differentiate between absolute convergence and conditional convergence.

Question 20

Differentiate between inward-oriented policies and outward-oriented policies.

Answer 20

Inward-oriented: Develop domestic industries by restricting imports, even if they are less costly. Less growth and slower convergence.

Outward-oriented: Integrate domestic industries with global companies through trade. Exports are deemed key drivers of growth. Increased standard of living and faster convergence.

Question 21

Explain expansionary monetary policy under a flexible interest rate regime.

Answer 21

Initially, expansionary monetary policy will lead to depreciation of the domestic currency as low interest rates cause a flight of capital to higher-yielding markets.

Question 22

Describe tools of regulatory intervention in markets.

Question 23

Explain the impact of the balance of payments flows on the exchange rate.

Question 24

Calculate and interpret the bid-ask spread on a spot or forward foreign currency quotation and describe the factors that affect the bid-ask spread.

Answer 24

A bid-ask spread describes the difference between the higher ask price and lower bid price. Greater market liquidity, multiple lines of business with the currency dealer, and greater transaction size all decrease the bid-ask spread. Market liquidity improves with popular currency pairs and times of day when the market is more active, while spreads increase with volatility to recognize dealer risk.

Question 25

Describe the economic rationale for regulatory intervention.

Question 26

Explain constraints to which a dealer must adhere to prevent arbitrage.

Question 27

Describe anticompetitive behavior.

Answer 27

Exclusive dealings and refusals to deal, price discrimination, and predatory pricing

Question 28

Describe the relation between the long-run rate of stock market appreciation and the sustainable growth rate of the economy.

Question 29

Describe relations among the international parity conditions, their use in assessing fair value of exchange rates, and their usefulness in forecasting future spot exchange rates.

Question 30

Explain classical growth theory (Malthusian model).

Question 31

Explain expansionary fiscal policy under a flexible interest rate regime.

Question 32

Describe the flow/supply demand channel.

Question 33

Describe uncovered and covered interest rate parity.

Question 34

Explain expansionary monetary policy under a fixed interest rate regime.

Question 35

Explain how natural resources affect economic growth.

Answer 35

Countries with abundant natural resources may focus too much on recovering those resources, while neglecting capital and labor.

The Dutch disease describes how domestic currency appreciation from natural resources exports may stunt growth in other areas.

Question 36

Explain the ex ante version of PPP.

Answer 36

Ex ante PPP asserts that expected changes in spot exchange rates are entirely driven by expected differences in national inflation rates rather than price levels. According to ex ante PPP, countries that are expected to see persistently high (low) inflation rates should expect to see their currencies depreciate (appreciate) over time.

Question 37

List favorable developments in a domestic economy that attract capital from foreign countries (pull factors).

Question 38

Calculate the forward premium or discount for a given currency.

Answer 38

Question 39

Differentiate between the effectiveness of central bank intervention in developed countries versus emerging market currencies.

Answer 39

The effect of currency intervention in developed countries is insignificant because the volume of intervention is dwarfed by the average FX trading volume. The effect on emerging markets is relatively more significant but still mixed overall.

Question 40

Establish purposes in regulating financial markets

Question 41

Explain why potential GDP and its growth rate matter for fixed-income investors.

Question 42

Explain the impact of capital restrictions on government intervention programs.

Question 43

Explain why, empirically, the classical model has not proven to be true.

Answer 43

Per capita income growth has not resulted in population growth (as assumed by the theory). In fact, population growth has historically slowed with economic growth.

The positive impact of technological progress on per capita income has outweighed the negative impact of diminishing marginal returns and demands of a growing population.

Question 44

Explain purchasing power parity and the international Fisher relation.

Answer 44

Purchasing power parity relates spot rate movement to changes in the relative price level in two countries. The international Fisher relation involves using inflation as a proxy for changes in price level, which assumes a basic real interest rate across all countries.

Question 45

Describe benefits and costs of regulation.

Answer 45

Regulatory burden refers to the costs of regulation for the regulated entity. It can be viewed as the private costs of regulation or complying with government regulation.

Net regulatory burden results from subtracting private benefits of regulation from private costs.

Question 46

Explain how investment in technological development affects economic growth.

Question 47

Define endogenous growth theory.

Question 48

Describe classifications of regulations and regulators.

Answer 48

Statutes: Laws enacted by legislative bodies.

Administrative regulations: Rules issued by government agencies and other regulators.

Judicial law: Interpretations of courts.

Regulations come from government agencies or private, self-regulatory organizations (i.e., SROs such as FINRA in the U.S.).

Question 49

Explain methods of convergence.

Question 50

Explain how endogenous growth models predict that internationalizing economies will lead to a permanent increase in the economic growth rate.

Question 51

Identify developments that cause domestic capital to flow out of a domestic economy (push factors)

Answer 51

Low interest rates in developed countries.

Increasing weights for emerging market assets in portfolios with a global allocation.

Question 52

Describe an ideal early warning system.

Question 53

Explain how demographics, immigration, and labor force participation affect the rate and sustainability of economic growth.

Question 54

Describe regulatory interdependencies and their effects.

Answer 54

Regulatory capture – The regulated determine the regulations, restricting potential competition and aligning rivals.

Regulatory competition – Attracting desirable businesses by providing the easiest regulatory environment.

Regulatory arbitrage – Circumventing regulation by locating in less regulated areas rather than changing behavior.

Question 55

Explain the neoclassical growth theory (Solow’s model).

Question 56

Explain why potential GDP and its growth rate matter for equity investors.

Question 57

Explain expansionary fiscal policy under a fixed interest rate regime.

Question 58

Calculate the mark-to-market value of a forward contract.

Answer 58

Question 59

Distinguish between capital deepening investment and technological progress.

Answer 59

Refers to an increase in the capital-labor ratio and is reflected in a movement along the same per-capita production function, which increases at a decreasing rate as the capital-labor ratio reaches a relatively high level.

Technological progress changes the trajectory of the production function.