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

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 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.

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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.

burning0spear

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.

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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.

burning0spear

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.

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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.

burning0spear

Which of the following is NOT a substantial component of the change in the long-term growth rate in an economy?

A) Changes in consumer spending.

B) Changes in employment levels.

C) Changes in spending on new capital inputs.

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Although consumer spending is the largest component of GDP, it is fairly stable over time. To forecast a country’s long-term economic growth trend, the trend growth rate can be decomposed into two main components: changes in employment levels and changes in productivity. The former component can be further broken down into population growth and the rate of labor force participation. The productivity component can be broken down into spending on new capital inputs and total factor productivity growth.

burning0spear

Which of the following is NOT a governmental structural policy that would promote the long-term growth in an economy?

A) A promotion of competition.

B) A redistributive tax system.

C) Minimal government interference in the economy.

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When wealth is redistributed through the government’s tax policy, economic inefficiency is created. Tax policies should promote economic growth as much as possible.

burning0spear

If population growth is expected to grow by 3%, labor force participation is expected to grow by 0.25%, spending on new capital inputs is projected to grow at 2.75% and total factor productivity will grow by 0.75%. What is the long-term projected growth rate?

A) 5.75%.

B) 6.75%.

C) 6.00%.

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The sum of the components is 3% + 0.25% + 2.75% + 0.75% = 6.75%, so the economy is projected to grow by this amount.

burning0spear

Which of the following is consistent with a steeply upwardly sloping yield curve?

A) Monetary policy is expansive and fiscal policy is expansive.

B) Monetary policy is expansive while fiscal policy is restrictive.

C) Monetary policy is restrictive and fiscal policy is restrictive.

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When both fiscal and monetary policies are expansive, the yield curve is sharply, upwardly sloping (i.e., short-term rates are lower than long-term rates), and the economy is likely to expand in the future.

burning0spear

Which of the following is consistent with a likely weak economy in the future?

A) Monetary policy is restrictive while fiscal policy is expansive.

B) Monetary policy is restrictive and fiscal policy is restrictive.

C) Monetary policy is expansive and fiscal policy is expansive.

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When both fiscal and monetary policies are restrictive, the yield curve is downward sloping (i.e., it is inverted as short-term rates are higher than long-term rates), and the economy is likely to contract in the future.