Question 1

Describe three types of gains from trades?

Accepted Answer

The three types of gains from trades are the ability to obtain goods or services that cannot be produced domestically, the ability to obtain goods or services at a lower price than what could be produced domestically, and the ability to obtain assets that can generate future income or appreciate in value. These correspond to trades of goods or services for goods or services, trades of goods or services for assets, and trades of assets for assets. Option B is the only one that includes all three types of gains.

Question 2

For most practical matters,economists assume that

Accepted Answer

The assumption of risk aversion is the most common and widely accepted assumption among economists. This means that individuals generally prefer certainty over uncertainty and that they require compensation for taking on additional risk.

Question 3

The international capital market is:

Accepted Answer

The international capital market is not a single market, but rather a group of closely interconnected markets in which asset exchanges with some international dimension take place. It includes markets for stocks, bonds, currencies, and other types of financial instruments. It is not subject to intense regulation or governed by a specific organization of fiscal policies.

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

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 other financial instruments. It encompasses a range of financial transactions, including borrowing and lending between firms, governments, and investors across national borders. While currency exchange is a part of it, it is not the only focus of the international capital markets.

Question 6

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 7

Asset trades that deal with debt instruments are best described as

Accepted Answer

Debt instruments refer to financial assets such as bonds or bank deposits that represent a borrower's obligation to repay a lender. Therefore, the best choice for asset trades dealing with debt instruments would be option E - bonds or bank deposits.

Question 8

Asset trades that deal with equity instruments are best described as

Accepted Answer

Asset trades that deal with equity instruments refer to buying and selling shares of stock in a company.

Question 9

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 pure...

Question 10

Risk averse people

Accepted Answer

Risk averse people may hold bonds denominated in several different currencies as a way to diversify their portfolio and reduce risk. However, they may also consider transaction costs as a factor in their decision-making process. Therefore, it is possible for risk averse people to hold bonds denominated in several different currencies, but it is not a certainty.

Question 11

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

Fact 2 and Fact 3 cancel each other out, resulting in no change. Fact 5 is an increase of $150,000, but since it is a deposit at Commonwealth Bank, it does not affect the reserve at the Fed. Therefore, there is no net effect on the reserve at the Fed.

Question 12

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 average mango harvest for Home is (5000+2500)/2 = 3750 tons.
The average mango harvest for Far Far Away is also (5000+2500)/2 = 3750 tons.
Therefore, the average for each country mango harvest is 3750 tons. Thus, the best choice is D.

Question 13

Equity Instruments include

Accepted Answer

Equity instruments refer to ownership stakes in a company, which can be in the form of stocks or shares. Stocks represent a portion of ownership in a corporation and are traded on stock exchanges. Bonds are debt instruments, while bank deposits and statements represent different types of financial accounts. Receipts can refer to a variety of documents and are not necessarily related to equity instruments. Therefore, the best choice for equity instruments is A) stocks.

Question 14

What is the basic motive for asset trade?

Accepted Answer

The basic motive for asset trade is to increase expected returns and reduce risk. This is achieved by diversifying the investment portfolio and investing in assets that have the potential for higher returns while also reducing overall risk.

Question 15

The idea of risk aversion

Accepted Answer

Risk aversion refers to individuals or companies seeking to avoid risks and uncertainties. This helps explain the profitability of insurance companies, as they provide a way for individuals and businesses to transfer their risks to the insurer in exchange for a premium. By pooling many risks together, insurers can spread the risk and make a profit while providing a valuable service to their customers. Therefore, the idea of risk aversion is not at odds with the idea of insurance, but rather helps to explain why insurance exists and why it can be a profitable industry.

Question 16

Using international asset trade,countries can

Accepted Answer

The answer of Using international asset trade,countries can
...

Question 17

Intertemporal trade is

Accepted Answer

Intertemporal trade refers to the exchange of goods and services for claims to future goods and services. Option A and B are incorrect because they limit the exchange to only goods or services. Option D is incorrect because it refers to trade between countries, while intertemporal trade includes trades within a single economy. Option E is irrelevant and not related to intertemporal trade.

Question 18

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 19

People who are risk averse

Accepted Answer

People who are risk averse are concerned not only about the potential returns on their investments but also about the risk that those returns may not be realized. Therefore, they value a collection of assets not only on the basis of its expected returns but also on the basis of the risk of that return. Option A is not the best choice because risk-averse individuals are not solely focused on expected returns. Option B is incorrect because they do consider expected returns. Option D makes an assumption based on limited information, and option E may or may not be true, as risk-averse individuals may still choose to diversify their portfolio.

Question 20

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.

Quiz 20: Financial Globalization: Opportunity and Crisis