Question :
20.1 The International Capital Market and the Gains from Trade
1) : 1303687
20.1 The International Capital Market and the Gains from Trade
1) 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) -$125, it is unclear what you would do without further information
D) $500, decline the gamble
E) -$125, decline the gamble
2) 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 now and future consumption
C) are not; asset swapping is immediate and involves only assets, while intertemporal trade takes two time periods and involves both assets and goods/services
D) could possibly be; different economic states occur at different points in time
E) are not; asset swapping never relates to intertemporal trade
3) 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?
A) -$150,000 due to import of good (current account debit)
B) +$150,000 due to import of good (current account credit)
C) -$150,000 due to deposit of Bank of England (capital account debit)
D) +$150,000 due to deposit of Bank of England (capital account credit)
E) No effect (150,000 current account debit and 150,000 capital account credit)
4) 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?
A) Fact 2 is a decrease of $150,000, fact 5 is a decrease of $150,000, a net effect of -$300,000.
B) Fact 3 is a decrease of $150,000, fact 5 is an increase of $150,000, a net effect of 0.
C) Fact 3 is an increase of $150,000, fact 5 is a decrease of $150,000, a net effect of 0.
D) Both fact 3 and fact 5 result in increases of $150,000, a net effect of +$300,000.
E) Both fact 3 and fact 5 result in decrease of $150,000, a net effect of -$300,000.
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:
A) no one will take the gamble.
B) risk averse individuals will take the gamble.
C) risk lovers individuals will not take the gamble.
D) risk neutral individuals will not take the gamble.
E) risk lovers and risk neutral individuals may take the gamble.
6) For most practical matters, economists assume that
A) individuals are risk neutral.
B) individuals are risk lovers.
C) individuals are risk averse.
D) most individuals are risk lovers.
E) most individuals are risk neutral.
7) People who are risk averse
A) value a collection of assets only on the basis of its expected returns.
B) value a collection of assets only on the basis of the risk of that return.
C) 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.
D) are less likely to invest in life insurance.
E) are less likely to have a diverse portfolio.
8) The idea of risk aversion
A) is at odds with the idea of insurance.
B) help explain the profitability of insurance companies.
C) has nothing to do with insurance companies.
D) help explain the losses suffers by the insurance industry.
E) help explain why insurance companies in the long run are zero profit companies.
9) Risk averse people
A) will never hold bonds denominated in several different currencies because of transaction costs.
B) will always hold bonds denominated in several different currencies because of transaction costs.
C) may hold bonds denominated in several different currencies.
D) may hold bonds denominated in several different currencies only if satisfying the well known interest party condition.
E) will hold only domestic bonds because of the home bias effect.
10) 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
A) 2500.
B) 2750.
C) 3500.
D) 3750.
E) 3000.
