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Which of the following statements regarding risk in emerging market economies is least accurate?
A)
Equity investors should focus on growth prospects and risk.
B)
Their undiversified nature makes them susceptible to volatile capital flows and economic crises.
C)
The economies are often heavily dependent on consumer durables.



Small economies are often heavily dependent on the sale of commodities and their undiversified nature makes them susceptible to volatile capital flows and economic crises.

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Which of the following is NOT an indication of high risk in an emerging market economy?
A)
A government committed to structural reform.
B)
A GDP growth rate of 3%.
C)
A high fiscal deficit.



If a government is supportive of structural reforms necessary for growth, then the investment environment is more hospitable. Growth rates less than 4% may indicate that the economy is growing slower than the population, which can be problematic in these underdeveloped countries.

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Which of the following is NOT indicative of low risk in an emerging market economy?
A)
A foreign debt level that is 75% of GDP.
B)
Foreign exchange reserves are twice that of the short-term debt.
C)
A current account deficit that is 2% of GDP.



Foreign debt levels greater than 50% of GDP indicate that the country may be overlevered. Debt levels greater than 200% of the current account receipts also indicate high risk. Current account deficits (roughly speaking, imports are greater than exports) greater than 4% of GDP can be problematic because the deficit must be financed through external borrowing. High risk is also indicated when foreign exchange reserves are less than the short-term debt that must be paid off in one year.

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An analyst believes that a recession is likely to develop that will affect many of the world economies. She believes that Country A’s GDP should be forecast using current and lagged economic data for it as well as from other countries that may influence Country A. What type of country is Country A and what type of forecasting model should be used? Country A is most likely a:
A)
large country and its GDP should be forecast using an econometric approach.
B)
small country and its GDP should be forecast using a checklist approach.
C)
small country and its GDP should be forecast using an econometric approach.



Small countries with undiversified economies are more susceptible to global events. Larger countries with diverse economies are less affected by events in other countries. An econometric approach can be very complex, involving several data items of various time periods lags to predict the future. They can be used to accurately model real world conditions.

TOP

Which of the following would indicate that a country is less affected by global events? The country is:
A)
small and has an undiversified economy.
B)
large and has a diversified economy.
C)
small and has a diversified economy.



Larger countries with diverse economies are less affected by events in other countries. Small countries with undiversified economies are more susceptible to global events.

TOP

Which of the following would be consistent with Country A having higher real interest rates than Country B?
A)
Country A has a tighter monetary policy and a faster growing economy.
B)
Country A has a looser monetary policy and a faster growing economy.
C)
Country A has a tighter monetary policy and a slower growing economy.



Countries with a tighter monetary policy and stronger economic growth will see higher currency values. In fact, in the early 1980s, the U.S. had high real and nominal interest rates due to a tight monetary policy, robust economy, and an increasing budget deficit. This resulted in a higher value for the dollar.

TOP

Which of the following statements regarding global economies is most accurate?
A)
Developed economies are perfectly integrated but not emerging countries.
B)
Neither emerging nor developed country economies are perfectly integrated.
C)
Both emerging and developed country economies are perfectly integrated.



Emerging market economies are noted for the fact that they are segmented (i.e., not integrated). Even among developed countries, economies are not perfectly integrated. For example, the Federal Reserve in the U.S. and the European Central Bank will respond to local effects in their economies, thus creating differences in U.S. and European economic growth.

TOP

Which of the following is NOT a characteristic of a checklist approach as used in economic forecasting? A checklist approach:
A)
may not be able to model complex relationships.
B)
requires subjective judgment.
C)
does not allow for changes in the model over time.



A checklist approach actually allows for changes in the model over time.

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Which of the following is NOT a characteristic of economic indicators as used in economic forecasting? Economic indicators:
A)
are difficult to understand and interpret.
B)
can be adapted for specific purposes.
C)
have an effectiveness that has been verified by academic research.



Economic indicators are actually easy to understand and interpret.

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Which of the following is NOT a characteristic of econometrics as used in economic forecasting? Econometrics:
A)
provides a straightforward method of creating a model.
B)
can provide precise quantitative forecasts of economic conditions.
C)
is better at forecasting expansions than recessions.



Econometric analysis can actually be difficult and time intensive to create.

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