burning0spear

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.

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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.

burning0spear

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.

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

burning0spear

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.

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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.

burning0spear

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.

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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.

burning0spear

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.

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

burning0spear

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.

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Economic indicators are actually easy to understand and interpret.

burning0spear

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.

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

burning0spear

Which of the following statements regarding interest rates and yields is most accurate?

A) An increase in short-term rates increases the yields on long-term bonds.

B) Short-term rates are independent of the yields on long-term bonds.

C) An increase in short-term rates may increase or decrease the yields on long-term bonds.

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A change in short-term rates has unpredictable effects. Usually an increase in short-term rates increases the yields on bonds. Bond yields may actually fall though if the interest rate increase is sufficient to slow the economy.

burning0spear

If a cash manager thought the economy was going to have a robust recovery, (s)he would:

A) shift from longer-term cash instruments to shorter-term cash instruments and from more credit worthy instruments to less credit worthy instruments.

B) shift from shorter-term cash instruments to longer-term cash instruments and from more credit worthy instruments to less credit worthy instruments.

C) shift from longer-term cash instruments to shorter-term cash instruments and from less credit worthy instruments to more credit worthy instruments.

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Interest rates will increase during a robust expansion. If a manager thought that interest rates were set to rise, (s)he would shift from say nine-month cash instruments down to three-month cash instruments. If (s)he thought that the economy was going to improve so that less creditworthy instruments would have less chance of default, (s)he would shift more assets into lower rated cash instruments. Longer maturity and less creditworthy instruments have higher expected return, but also more risk.

burning0spear

If inflation rises, the yields for TIPS will:

A) rise and their price will fall.

B) rise and their price will rise.

C) fall and their price will rise.

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If inflation starts rising, the yields for U.S. Treasury Inflation Protected Securities (TIPS) will actually fall and their prices will rise because the demand for them increases as investors seek out their inflation protection.