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Unformatted text preview: Chapter 21: The Global Capital Market: Performance and Policy Problems Multiple Choice Questions 1. What are three things to measure for in evaluating the performance of the capital markets? A. Level of Intertemporal Trade, International Trade, Portfolio Diversification B. Level of Portfolio Diversification, Balanced Capital Accounts, Global Inflation C. Level of Portfolio Diversification, Intertemporal Trade, Efficiency of Foreign Exchange D. Onshore-Offshore Interest Rate Parity, Level of Portfolio Diversification, Stability of Eurocurrency Market E. Onshore-Offshore Interest Rate Parity, Interest Parity and Foreign Exchange, Balanced Capital Accounts Answer: C 2. In the Interest Parity Condition, R t-R* t = (E e t+1-E t )/E t +x t , where R t-R* t is the interest rate differential and (E e t+1-E t )/E t is the expected change in the exchange rate, what does x t stand for if it potentially is a market efficient difference between the two? A. Market inefficiency B. Risk premium C. Forecast error D. Tracking error E. Excessive volatility Answer: B 3. As a country begins to liberalize its capital account, what would you expect to happen to the difference between the interest rates for similar assets in this country and another country with open capital markets? A. It would get larger. B. It would get smaller. C. It would stay the same. D. None of the above. E. Not enough information. Answer: B 4. If you are offered a gamble in which you win 500 dollars 3/8 of the time and you lose 500 dollars 5/8 of the time, what is your expected payoff and your behavior given that you are a risk-lover? A. $500, take the gamble B.-$125, take the gamble C.-$12 , you are indifferent D. $500, decline the gamble E.-$125, decline the gamble Answer: B 5. The two types of trade, intertemporal and pure asset swap _____ perfect substitutes, because A. are; they both offer considerable payoff and are equal in the long run. B. are; they both involve the smoothing out of current and future consumption. 90 C. are not; asset swapping is immediate and involves only assets, while intertamporal trade takes two time periods and involves both assets and goods/services. D. Both B and C. E. could possibly be, as different economic states occur at different points in time. Answer: E 6. A shadow price is A. a time-lagged variable that is only apparent after the current period. B. something that has to do with trees out the window. C. a price neither in nor determined by a market. D. the discounted price of a foreign asset in the home country. E. the marginal utility of future consumption. Answer: C 7. For the following question assume the following facts: 1: Balance of Payments = 0 prior to the transactions....
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- Spring '10