midterm problem sets

Question 1

FPI vs FDI

Answer 1

control variance: FPI requires no active management, while FDI is purchased for the purpose of asset control

Question 2

political influence on trade

Answer 2

firms investing to avoid trade barriers or taking advantage of economic incentives from host countries

Question 3

why do country-based theories not account for intraindustry trade?

Answer 3

examines differences between countries over firms

Question 4

protectionism rationales

Answer 4

helping domestic firms compete at home and abroad

Question 5

unemployment protectionism rationale

Answer 5

desire for high employment for maintained compensation, where the government bears costs

Question 6

infant industry protectionism rationale

Answer 6

shield emerging industry from foreign competitors through tariffs, quotas and subsidies - may not always work

Question 7

industrialization protectionism rationale

Answer 7

shielding industry from lower-priced products to improve competition - may spur FDI, or increase pricing

Question 8

economic relationship protectionism rationale

Answer 8

comparison of performance to other countries to improve position - allows for agreements, access, payments

Question 9

gold standard rules of the game

Answer 9

country’s money supply was limited to the amount of gold held by its central bank or treasury

Question 10

defending a fixed rate

Answer 10

currency exchange value preserved by exchanging for gold under demand of foreign banks, restricting growth rates from causing inflation

Question 11

why did Bretton Woods fail?

Answer 11

the US dollar becomes overvalued and there is not enough gold reserves to back it, leading to floating rates

Question 12

crawling peg system

Answer 12

government will make occasional adjustments in fixed rate of exchange due to changes in quantitative indicators

Question 13

currency board

Answer 13

country issues its own currency but that currency is backed 100% by foreign exchange holdings of a hard foreign currency

Question 14

special drawing right

Answer 14

international reserve asset by the IMF to supplement existing foreign exchange reserves, a unit of account for the IMF as basket of currencies acting as the base for currency pegging

Question 15

What institution provides the primary source of similar statistics for balance of
payments and economic performance worldwide?

Answer 15

IMF

Question 16

signals from BOP

Answer 16

pressure on foreign exchange rate, removal of control over payments/fees, market potential

Question 17

what kind of statement is BOP

Answer 17

cash flow statement

Question 18

two types of economic activity measured by BOP

Answer 18

current, capital/financial

Question 19

difference between real and financial assets

Answer 19

real: goods/services, financial: shares/claims

Question 20

balance on goods

Answer 20

imports and exports

Question 21

balance on current account

Answer 21

balance on goods plus expenses, income, transfers

Question 22

basic balance

Answer 22

international transactions from market forces

Question 23

overall balance

Answer 23

total change in a country’s foreign exchange reserves caused by the basic balance plus any governmental action to influence foreign exchange reserves

Question 24

China’s twin surpluses

Answer 24

current account surplus and financial account surplus - indicated growth of Chinese economy

Question 25

The U.S. dollar has maintained or increased its value over the past 20 years despite running a gradually increasing current account deficit. Why has this occurred?

Answer 25

current account deficit has been offset by an inflow of dollars on capital and financial accounts

Question 26

Brazil has experienced periodic depreciation of its currency over the past 20 years despite occasionally running a current account surplus. Why has this phenomenon occurred?

Answer 26

capital flight

Question 27

sum of the current and capital accounts do not approximate zero - fixed exchange rate system

Answer 27

government is expected to intervene in the foreign exchange market by buying or selling official foreign exchange reserves

Question 28

sum of the current and capital accounts greater than zero - fixed exchange rate system

Answer 28

government must intervene in the foreign exchange market and sell domestic currency for foreign currencies or gold in order to bring the BOP back to near zero

Question 29

BOP and floating exchange rate system

Answer 29

market will bring back to zero where government has no responsibility to peg foreign exchange rate

Question 30

capital mobility in recent years

Answer 30

huge increase

Question 31

countries control inflows or outflows more?

Answer 31

inflows, easier to regulate outflows if inflows are regulated

Question 32

How does capital mobility typically differ between industrialized countries and emerging market countries?

Answer 32

industrialized countries have larger financial sectors allowing larger capital inflow

Question 33

serious form of the Fisher Effect

Answer 33

has r x i added

Question 34

interest rate parity

Answer 34

The difference in the national interest rates for securities of similar risk and maturity should be equal to, but opposite in sign to, the forward rate discount or premium for the foreign currency, except for transaction costs

Question 35

covered interest rate arbitrage

Answer 35

between spot and forward rates

Question 36

uncovered interest rate

Answer 36

between interest and future spot rates, risk of exchanging currency yield

Question 37

if transaction costs for undertaking covered or uncovered interest arbitrage were large, how do you think it would influence arbitrage activity?

Answer 37

large discrepancies between market rates and quotes, as a higher transaction cost would dissuade many arbitragers from making the trades for small amounts