Question 1

What would best describe the international capital markets?

Accepted Answer

The international capital markets involve the trading of assets (such as stocks, bonds, and currencies) between residents of different countries, making option D the most accurate description. Real estate and currency markets can also be a part of the international capital markets, but they are not the only components of it.

Question 2

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 3

People who are risk averse

Accepted Answer

People who are risk averse consider both the expected returns and the risk of that return when valuing a collection of assets. They tend to prioritize minimizing risk over maximizing returns. Therefore, they may be more hesitant to invest in riskier assets and may prefer a diversified portfolio. However, their risk aversion may also lead them to invest in life insurance as a means of managing risk.

Question 4

Asset trades that deal with debt instruments are best described as

Accepted Answer

Debt instruments refer to financial securities that represent a liability, such as bonds or bank deposits, where an individual or organization lends money to another. Therefore, asset trades that deal with debt instruments would involve buying or selling bonds or other debt securities. The other choices (A, B, C, and D) do not involve debt instruments.

Question 5

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 6

Intertemporal trade is

Accepted Answer

Intertemporal trade involves the exchange of both goods and services for claims to future goods and services. None of the other options accurately describe intertemporal trade.

Question 7

Equity Instruments include

Accepted Answer

Equity instruments represent ownership interest held by shareholders in an entity (a company, partnership, or trust), and stocks are the most common form of equity instruments. They give the holder a share in the company's profits (via dividends) and voting rights. Bonds, bank deposits, receipts, and bank statements are not equity instruments; bonds are debt instruments, while the others are not securities.

Question 8

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 9

The international capital market is:

Accepted Answer

The international capital market is not a single market but a collection of interconnected markets that involve the exchange of assets with some international dimension. It includes markets for stocks, bonds, currencies, and other financial instruments. It is not subject to intense regulation nor is it an organization of fiscal policies. Therefore, option D is the best choice.

Question 10

Asset trades that deal with equity instruments are best described as

Accepted Answer

Equity instruments refer to ownership in a company, which is typically represented by shares of stock. Therefore, asset trades dealing with equity instruments would involve the buying and selling of shares of stock.

Question 11

For most practical matters,economists assume that

Accepted Answer

The assumption that individuals are risk averse is the most commonly accepted assumption in economics for practical matters. This means that most individuals prefer certainty over uncertain outcomes and are willing to give up potential gains to avoid potential losses.

Question 12

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 13

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 and...

Question 14

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 15

Using international asset trade,countries can

Accepted Answer

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

Question 16

Describe three types of gains from trades?

Accepted Answer

Option B provides three types of gains from trades that are accurate and relevant. Trades of goods or services for goods or services refer to barter transactions where both parties gain from exchanging goods or services they need. Trades of goods or services for assets refer to transactions where a person or business purchases assets (like stocks, real estate, etc.) with the money they earn from selling goods or services they produce. This allows them to create value while also accumulating assets that can appreciate over time. Finally, trades of assets for assets refer to transactions where a person or business exchanges one asset for another, with the goal of either diversifying their portfolio or making a profit from fluctuations in asset prices.

Question 17

The idea of risk aversion

Accepted Answer

Risk aversion refers to individuals' tendency to avoid risky situations, and this often leads them to purchase insurance to protect themselves from potential losses. Therefore, risk aversion helps explain the profitability of insurance companies as they provide a service that meets the needs of risk-averse clients.

Question 18

Risk averse people

Accepted Answer

Risk averse people may hold bonds denominated in several different currencies because of the benefits of diversification. However, they may also be cautious of transaction costs associated with buying and selling multiple currencies. Therefore, the answer is C, as it allows for the possibility of holding bonds in multiple currencies but acknowledges that transaction costs may play a role in their decision-making.

Question 19

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

The purchase of the airplane by Person A from British Airways (fact 2) does not have any direct effect on the Fed's reserve. 
When Person A pays with a check from his First Union Bank account(fact 3), the reserves held by First Union Bank would decrease by $150,000. 
When British Airways deposits the check at the Bank of England (fact 4), the reserves held by Bank of England would increase by $150,000. 
When Bank of England deposits the $150,000 at Commonwealth bank, which is located in the United States (fact 5), the reserves held by the Commonwealth bank would increase by $150,000. 
Therefore, the net effect on the Fed's reserve is zero, as the decrease in First Union Bank's reserves (fact 3) is offset by the increase in the reserves of the Commonwealth bank (fact 5).

Question 20

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 trade assets in order to diversify their portfolio and align it with their investment goals. By reducing risk through diversification, investors can increase their expected returns.

Quiz 20: Financial Globalization: Opportunity and Crisis