Question 1

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, such as stocks, bonds, and currencies. It is a global marketplace where capital flows across nations and continents, and investors buy and sell securities issued by companies, governments, and other entities around the world. The international capital markets are critical for promoting economic growth, facilitating investment, and enabling development in emerging markets.

Question 2

People who are risk averse

Accepted Answer

People who are risk averse take into account not only the expected returns of a collection of assets but also the risk of that return. They tend to prioritize stability and preservation of their capital over potential gains, which means they are often more cautious in their investment decisions. This may lead them to choose investments with lower returns but lower risk. As a result, they may have a more conservative portfolio that is less diverse. It is not necessarily true that they would be less likely to invest in life insurance.

Question 3

Using international asset trade, countries can

Accepted Answer

A

Question 4

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 5

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 6

Describe three types of gains from trades?

Accepted Answer

The three types of gains from trades are trades of goods or services for goods or services, trades of goods or services for assets, and trades of assets for assets. Option B correctly identifies these types of trades. Option A and C are incorrect as they do not accurately describe the types of gains from trades. Option D is incorrect as it only describes trades involving services and currency, leaving out trades involving goods and assets. Option E is also incorrect as it includes trades of current goods for future services, which is not a typical type of trade.

Question 7

The international capital market is:

Accepted Answer

The international capital market is not a single market, but rather a group of interconnected markets where assets are exchanged with some international dimension. It includes the bond market, stock market, and foreign exchange market. It is also not subject to intense regulation nor an organization of fiscal policies that dictate international trade. Therefore, the best answer is D.

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...

Question 9

For most practical matters, economists assume that

Accepted Answer

The most common assumption in economics is that individuals are risk averse, meaning that they prefer a certain outcome to a risky outcome with the same expected value. This assumption is used to explain a wide range of decision-making behavior, such as saving, investing, and insurance choices. While some individuals may be risk lovers, this is not the most common assumption. Similarly, assuming that individuals are risk neutral is less realistic, as it implies that individuals are indifferent between a certain outcome and a risky outcome with the same expected value.

Question 10

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 11

What is the basic motive for asset trade?

Accepted Answer

The basic motive for asset trade is to increase expected returns and reduced risk. This is achieved through diversification of the investment portfolio and allocation of assets in different markets and sectors. The other options listed - belief in large risks leading to large returns, restoration of the balance of payments, portfolio unification, and economic stability - may be factors that influence asset trade decisions, but they are not the primary motive.

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

Question 13

Asset trades that deal with equity instruments are best described as

Accepted Answer

Equity instruments, also known as stocks or shares of stocks, represent ownership in a company and are traded on stock exchanges.

Question 14

The idea of risk aversion

Accepted Answer

Risk aversion refers to the tendency of individuals to avoid uncertain outcomes or losses. This helps explain why people are willing to purchase insurance to protect themselves from potential losses. Insurance companies are able to profit from this behavior by pooling the risks of many policyholders and collecting premiums that are greater than the amount paid out in claims. Thus, the idea of risk aversion helps explain the profitability of insurance companies.

Question 15

Asset trades that deal with debt instruments are best described as

Accepted Answer

Asset trades that deal with debt instruments refer to financial transactions involving bonds or bank deposits. These are forms of debt that can be bought and sold by investors, providing a way for both individuals and institutions to invest in lending and borrowing activities. Shares of stock, exchange rates, receipts, and factors do not necessarily involve debt instruments.

Question 16

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 17

Intertemporal trade is

Accepted Answer

Intertemporal trade refers to the exchange of present goods and services for claims on future goods and services. Therefore, choice C is the correct answer as it includes both goods and services in the trade and the claims are for both future goods and services. The other choices are incorrect as they do not fully describe the concept of intertemporal trade.

Question 18

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 uses a check drawn on his account at a US bank, there is no impact on the Fed's reserve. Thus, there is no effect on the reserve at the Fed. Fact 3 is a decrease in person A's account balance and fact 5 is an increase in the Commonwealth bank's reserve balance. These two effects cancel each other out, resulting in a net effect of 0 on the reserve at the Fed.

Question 19

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. While there may be transaction costs associated with buying and selling bonds in different currencies, the potential benefits of diversification may outweigh these costs. It is not always necessary for the well-known interest party condition to be satisfied, as risk averse investors may hold a diversified portfolio to reduce overall risk. Additionally, while some investors may exhibit a home bias effect and prefer to hold only domestic bonds, this is not necessarily true for all risk averse investors.

Question 20

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.

Quiz 20: Financial Globalization: Opportunity and Crisis