Question 1

What is the basic motive for asset trade?

Accepted Answer

The basic motive for asset trade is to increase expected returns and reduce risk. Investors seek to diversify their portfolios in order to minimize risk and maximize returns. By trading assets, they can achieve this goal by reallocating their investments into different asset classes, regions, or sectors. This can help reduce the overall risk of their portfolio while increasing expected returns.

Question 2

Using international asset trade, countries can

Accepted Answer

A

Question 3

People who are risk averse

Accepted Answer

People who are risk averse consider both the expected returns and the risk of those returns when valuing a collection of assets. This helps them make more conservative investment decisions that prioritize preserving their wealth over seeking higher returns. Options D and E are not necessarily true for all risk-averse individuals and are too narrow to represent the overall attitude towards risk aversion. Choice A is incorrect as risk-averse individuals do not value assets solely on the basis of their expected returns.

Question 4

What are the three types of transactions between the residents of different countries?

Accepted Answer

The answer of What are the three types of transactions...

Question 5

Imagine that there are two countries, Home and Far Far Away, and that residents of each own only one asset, domestic land yielding an annual harvest of mangoes. Assume that the yield on the land is uncertain. Half the time, Home's land yields a harvest of 5,000 tons of mangoes at the same time as Far Far Away's land yields a harvest of 2,500 tons. The other half of the time the outcomes are reversed. The average for each country mango harvest is

Accepted Answer

The answer of Imagine that there are two countries, Home...

Question 6

Asset trades that deal with debt instruments are best described as

Accepted Answer

Asset trades that deal with debt instruments refer to trades involving bonds or bank deposits.

Question 7

Equity Instruments include

Accepted Answer

Equity instruments are financial instruments that represent ownership in a company, such as stocks/shares. Bonds represent debt and are not considered equity instruments. Bank deposits, receipts, and bank statements are not equity instruments either.

Question 8

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?

Accepted Answer

The answer of If you are offered a gamble in...

Question 9

Describe three types of gains from trades?

Accepted Answer

The three types of gains from trades are: 
1) Trades of goods or services for goods or services - both parties involved in the trade receive goods or services that they value more than what they gave up. This results in a mutual gain for both parties. 
2) Trades of goods or services for assets - one party receives an asset (such as property, stocks, or bonds) that they value more than what they gave up, while the other party receives the goods or services that they value more. This again results in a mutual gain for both parties. 
3) Trades of assets for assets - both parties involved in the trade exchange assets that they value less for assets that they value more. This type of trade can lead to mutual gains as both parties end up with more valuable assets than they started with.

Option A is incorrect because it lists specific examples of trades rather than categories. Option C is incorrect because it implies that gains from trades are limited to only a certain type of transaction (import/export or natural resources/financial assets). Option D is incorrect because the examples given are limited and do not cover all possible types of gains from trades. Option E is incorrect because the examples given are not representative of the most common types of gains from trades.

Question 10

Suppose one is offered a gamble in which you win $1,000 half the time but lose $1,000 half the time. Since in this case one is as likely to win as to lose the $1,000, the average payoff on this gamble-its expected value-is: 0.5 ∗ $1,000 + 0.5 ∗ (-$1,000) = 0.
Under such circumstances:

Accepted Answer

Risk averse individuals would not take the gamble because the potential loss of $1,000 outweighs the gain of $1,000. However, risk lovers and risk neutral individuals may take the gamble because they are not as concerned about potential losses and may focus more on the potential gain. The expected value of the gamble is 0, but some individuals may still choose to take the risk for the chance of winning $1,000.

Question 11

For the following question assume the following facts: (1) Balance of Payments = 0 prior to the transactions.
(2) Person A (who lives in the United States) purchases an airplane from British Airways for $150,000.
(3) Person A pays with a check from his account at First Union Bank in the United States.
(4) British airways, since it will need dollars in 1 month, deposits the check at the Bank of England.
(5) Bank of England deposits the $150,000 at Commonwealth bank, which is located in the United States.
Due to the transactions above, what are the effects on the balance of payments?

Accepted Answer

The purchase of the airplane is recorded as a debit in the current account because it's an import. The deposit by the Bank of England in the United States is a capital inflow, recorded as a credit in the capital account. The balance of payments remains zero because the debit in the current account is offset by the credit in the capital account.

Question 12

The idea of risk aversion

Accepted Answer

Risk aversion refers to the tendency of individuals to prefer certainty over uncertainty. This helps explain the profitability of insurance companies as they provide a way for individuals to transfer the risk of uncertain events (such as accidents, illnesses, etc.) to the insurer in return for a premium. The insurer then pools the risks of many individuals, allowing them to spread the cost of any losses among the entire group. This reduces the risk for each individual and makes them willing to pay a premium for the insurance.

Question 13

For the following questions assume the following facts: (1) Balance of Payments = 0 prior to the transactions.
(2) Person A (who lives in the United States) purchases an airplane from British Airways for $150,000.
(3) Person A pays with a check from his account at First Union Bank in the United States.
(4) British airways, since it will need dollars in 1 month, deposits the check at the Bank of England.
(5) Bank of England deposits the $150,000 at Commonwealth bank, which is located in the United States.
Due to the transactions above, what are the effects on the reserve at the Fed?

Accepted Answer

Since Person A paid with a check from their account at First Union Bank, that means the reserve at the Fed will decrease by $150,000 (Fact 3). However, when British Airways deposits the check at the Bank of England, the Bank of England will deposit the $150,000 at Commonwealth Bank in the United States, which means it will increase the reserve at the Fed by $150,000 (Fact 5). Therefore, the net effect on the reserve at the Fed is zero.

Question 14

Intertemporal trade is

Accepted Answer

Intertemporal trade involves the exchange of current goods and services for future goods and services, which are represented by claims or assets such as bonds, stocks, or other financial instruments. This can involve both goods and services, and the exchange is made with the expectation of future returns. The other answer choices are incorrect as they either exclude one category of goods or services or focus on a specific type of trade that is not necessarily related to intertemporal trade.

Question 15

Asset trades that deal with equity instruments are best described as

Accepted Answer

Equity instruments refer to ownership in a company, such as stocks or shares of stock. Therefore, asset trades related to equity instruments would involve the buying and selling of shares of stock.

Question 16

The international capital market is:

Accepted Answer

The international capital market is not a single market, but a group of closely interconnected markets in which asset exchanges with some international dimension take place. It involves the buying and selling of various types of financial assets, such as stocks, bonds, currencies, and derivatives, by investors from different countries. It is not subject to intense regulation by the Basel committee or an organization of fiscal policies that dictate international trade.

Question 17

Risk averse people

Accepted Answer

Risk averse people may hold bonds denominated in several different currencies as a diversification strategy to reduce their overall risk. However, transaction costs may still be a consideration and they may need to evaluate whether the benefits of diversification outweigh those costs. The well-known interest party condition, which refers to the idea that parties with a specific interest or expertise in a certain type of investment may have an advantage over other investors, is not necessarily relevant in this context. The home bias effect, where investors tend to hold a disproportionate amount of domestic assets, may also influence their decision, but it is not a definitive factor.

Question 18

What would best describe the international capital markets?

Accepted Answer

The international capital markets refer to the market in which residents of different countries trade assets, including stocks, bonds, and currencies. It is not limited to the exchange of any one particular asset, such as real estate or currency.

Question 19

For most practical matters, economists assume that

Accepted Answer

In economics, it is generally assumed that most individuals are risk averse, meaning people prefer to avoid risk if possible. This assumption helps explain why people may be more likely to choose a guaranteed payment over a risky one, even if the expected value of the risky payment may be higher. However, it should be noted that there are some individuals who may be risk neutral or risk loving, and these individuals may behave differently in certain situations.

Question 20

The two types of trade, intertemporal and pure asset swap ________ perfect substitutes, because ________.

Accepted Answer

The answer of The two types of trade, intertemporal and...

Quiz 20: Financial Globalization: Opportunity and Crisis