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Macroeconomics Help  
User currently offlineAirxLiban From Lebanon, joined Oct 2003, 4511 posts, RR: 53
Posted (8 years 2 months 1 week 2 days 22 hours ago) and read 831 times:

I've got a Macroeconomics exam tomorrow and I have been studying for it but not quite enough unfortunately (Derivatives at 14:30 BST today).

So I thought I would be really cheeky and post some macro questions on here in the hope that some fellow a.nutters could lend me their ears.

These questions are quite interesting, I reckon. With the exception of the 3rd one, I think they may be of wider interest to more than just the economists among us.

Here goes:

1. Is there any good reason to expect output to follow a cyclical patten over time?

2. How can one account for a short-run tradeoff between unemployment and inflation?

3. How would you judge a long-run growth model to be satisfactory?

4. Why has inflation targeting become so popular?

5. Why might a country fix its exchange rate?

Thanks in advance!


PARIS, FRANCE...THE BEIRUT OF EUROPE.
23 replies: All unread, jump to last
 
User currently offlineComorin From United States of America, joined May 2005, 4896 posts, RR: 16
Reply 1, posted (8 years 2 months 1 week 2 days 11 hours ago) and read 802 times:

Quoting AirxLiban (Thread starter):
1. Is there any good reason to expect output to follow a cyclical patten over time?

Yes, since demand is also cyclical. Cyclicality results from a system seeking equilibrium. Any perturbation in demand will cause a lagged response in output, and the swings ( overshoots and undershoots) occur as things catch up and reach equilibrium again. You have analogues in the physical world - control systems, damped springs and so on.

2. How can one account for a short-run tradeoff between unemployment and inflation?

Any increase in the inflation rate will cause the Central Bank to increase interest rates. This makes borrowing costlier and slows down the economy. This in turn leads to fewer new jobs in the sort term until equilibrium is reached.

3. How would you judge a long-run growth model to be satisfactory?

DK

4. Why has inflation targeting become so popular?

Greenspan believed that inflation was an insidious corrosion of wealth as purchasing power dipped, and this is the view of most economists today in the industrialized world. Monetary policy today is aimed at controlling inflation, taking precedence over other objectives such as employment or GDP growth.


5. Why might a country fix its exchange rate?

Countries fix their exchange rate for one of two reasons. First they may want to support a rate that keeps their goods and services cheaper than if the currency floated (China). Secondly, They could also peg their local currency to the dollar to dollarize their economy and remove FX risk to foreign investors and provide cost stability to local importers. I think Argentina did this for a while, if I remember correctly.


PS: I also do brain surgery in my spare time!  Wink


User currently offlineN174UA From United States of America, joined Jun 2006, 994 posts, RR: 0
Reply 2, posted (8 years 2 months 1 week 2 days 10 hours ago) and read 797 times:

Quoting AirxLiban (Thread starter):
4. Why has inflation targeting become so popular?

Economists, as well as businesses, always look to tomorrow and beyond, and not focus on today. Therefore, price stability is ultra-critical, so if businesspeople can reliably forecast say, 3-4% inflation every year, they can budget more accurately both short term and long term.

Quoting AirxLiban (Thread starter):
5. Why might a country fix its exchange rate?

I think a more appropriate question is why would a country fix it's rate, and not let it float in the international market? If a nation has a fixed exchange rate, they are going to have to continually buy or sell its cash reserves in order to maintain that specified rate. If a nation's exchange rate is fixed, the BP curve will be steeper (inelastic). Refer to the IS-LM-BP discussion in your text.

I just finished Macro at Seattle Univ. this Spring...got a B, only because I tanked on the Aggregate Supply and Demand part. Interesting topic, but the theory is complicated and abstract. I should be able to answer the rest, but they seem subjective, so I guess as long as you can support yoru answers with relevant theory and data, you should be OK!

Good luck on your exam!


User currently offlineAirxLiban From Lebanon, joined Oct 2003, 4511 posts, RR: 53
Reply 3, posted (8 years 2 months 1 week 2 days 9 hours ago) and read 783 times:

Thank you, gentlemen, for the responses. Exam is in 8 hours. I'm screwed. Will report back in 12 hours.


PARIS, FRANCE...THE BEIRUT OF EUROPE.
User currently offlineKevinL1011 From United States of America, joined Mar 2005, 2964 posts, RR: 48
Reply 4, posted (8 years 2 months 1 week 2 days 9 hours ago) and read 777 times:

Quoting AirxLiban (Thread starter):
1. Is there any good reason to expect output to follow a cyclical patten over time?

Seasonal Demand and Product life cycle

Quoting AirxLiban (Thread starter):

2. How can one account for a short-run tradeoff between unemployment and inflation?

When inflation rises, demand drops. When demand drops, production drops and fewer workers are needed.

Quoting AirxLiban (Thread starter):
3. How would you judge a long-run growth model to be satisfactory?

By NET earnings. Net earnings (profit) should increase 3-5% annually.

Quoting AirxLiban (Thread starter):
4. Why has inflation targeting become so popular?

Because Consumer Confidence and Personal Disposable Income are directy affected.

Quoting AirxLiban (Thread starter):
5. Why might a country fix its exchange rate?

Because Inflation or Deflation is out of control.

[Edited 2006-06-27 02:59:02]


474218, Carl, You will be missed.
User currently offlineAirxLiban From Lebanon, joined Oct 2003, 4511 posts, RR: 53
Reply 5, posted (8 years 2 months 1 week 2 days 3 hours ago) and read 752 times:

Exam in 1 hour 10 minutes, going to DIEEEEEEEEEEEEEEEEEE


PARIS, FRANCE...THE BEIRUT OF EUROPE.
User currently offlineAirxLiban From Lebanon, joined Oct 2003, 4511 posts, RR: 53
Reply 6, posted (8 years 2 months 1 week 1 day 22 hours ago) and read 735 times:

Wow - actually passed. Test wasn't that bad. I answered questions on persistent unemployment, monetary policy implementation changes and of course the comparison between fixed and floating rates.

Thanks guys.



PARIS, FRANCE...THE BEIRUT OF EUROPE.
User currently offlineComorin From United States of America, joined May 2005, 4896 posts, RR: 16
Reply 7, posted (8 years 2 months 1 week 1 day 21 hours ago) and read 733 times:

Congrats! Now GET SOME SLEEP!!  Wink

User currently offlineAirxLiban From Lebanon, joined Oct 2003, 4511 posts, RR: 53
Reply 8, posted (8 years 2 months 1 week 1 day 19 hours ago) and read 726 times:

Quoting Comorin (Reply 7):
Congrats! Now GET SOME SLEEP!!

Fixed income exam tomorrow Sad then two more on Friday before freedom!



PARIS, FRANCE...THE BEIRUT OF EUROPE.
User currently offlineComorin From United States of America, joined May 2005, 4896 posts, RR: 16
Reply 9, posted (8 years 2 months 1 week 21 hours ago) and read 706 times:

OK, so how did it go? I'm curious about the type of questions you got in Fixed Income...

All the best!


User currently offlineAirxLiban From Lebanon, joined Oct 2003, 4511 posts, RR: 53
Reply 10, posted (8 years 2 months 1 week 18 hours ago) and read 698 times:

Part A (50% marks): Answer ALL questions

1. State Irving Fisher's Theory of interest. Can the real interest rate be negative? Now, consider an economy that is expected to grow in the future and where inflation is expected to decrease due to contractionary monetary policy. What would happen to real and nominal interest rates? Explain your ansewr.

2. Consider two portfolios with the same duration. Under which conditions would the change in their values when interest rates change be the same? Explain your answer.

3. What is the difference between the Basel Accord and the proposed New Basel Accord? How would the regular optimally adjust banks' risk-weights when loan default increases? How would banks adjust their risk-weights under the proposed New Basel Accord, if they use the IRB approach? What would be the effect on credit extension in each case?

4. What question is being asked in VaR? State the formula. What are the advantages and the disadvantages of VaR?

5. What are the assumptions of the Merton Model and how is it implemented? What is it trying to achieve? What are its advantages and disadvantages?

Part B: long answers - there were two, dealing with the term structure of internet rates (deriving the yield curve) and calculating the price of a call option from a binomial tree.



PARIS, FRANCE...THE BEIRUT OF EUROPE.
User currently offlineSingapore_Air From United Kingdom, joined Nov 2000, 13742 posts, RR: 19
Reply 11, posted (8 years 2 months 1 week 12 hours ago) and read 688 times:

What kind of exam is that?! My Macroeconomics (year 2, Honours degree) was much easier... I think.


Anyone can fly, only the best Soar.
User currently offlineAeroWesty From United States of America, joined Oct 2004, 20563 posts, RR: 62
Reply 12, posted (8 years 2 months 1 week 12 hours ago) and read 682 times:

Quoting AirxLiban (Reply 10):
2. Consider two portfolios with the same duration. Under which conditions would the change in their values when interest rates change be the same? Explain your answer.

Is there a word or two missing in this question?



International Homo of Mystery
User currently offlineAirxLiban From Lebanon, joined Oct 2003, 4511 posts, RR: 53
Reply 13, posted (8 years 2 months 1 week 11 hours ago) and read 675 times:

In reply 10 I was answering Comorin's question in reply 9. That was my fixed income exam.

Quoting AeroWesty (Reply 12):
Is there a word or two missing in this question?

Nope - what were you thinking of?



PARIS, FRANCE...THE BEIRUT OF EUROPE.
User currently offlineComorin From United States of America, joined May 2005, 4896 posts, RR: 16
Reply 14, posted (8 years 2 months 1 week 10 hours ago) and read 671 times:

Airxliban,

Thanks for sharing your exam. Those are pretty good questions - now you are ready to be a bond trader !

I note that you were fortunate in not having to calculate the OAS on a callable bond !

In question 2, all I can think of is that if portfolios with the same duration have different convexities, then for anything more than a small delta in rates, they will end up with different values.

I'm pretty impressed with your program, as this would usually be MBA-level knowledge.

Anyway, it's over now. Time for you to enjoy real life, and time for me to get back to Sudoku!


User currently offlineAeroWesty From United States of America, joined Oct 2004, 20563 posts, RR: 62
Reply 15, posted (8 years 2 months 1 week 10 hours ago) and read 669 times:

Quoting AirxLiban (Reply 13):
Quoting AeroWesty (Reply 12):Is there a word or two missing in this question?
Nope - what were you thinking of?

2. Consider two portfolios with the same duration. Under which conditions would the change in their values when interest rates change be the same? Explain your answer.

It's missing either a couple of words or proper punctuation. Like:

2. Consider two portfolios with the same duration. Under which conditions would the change in their values, when interest rates change, be the same? Explain your answer.

It's all jumbled as it is.



International Homo of Mystery
User currently offlineAirxLiban From Lebanon, joined Oct 2003, 4511 posts, RR: 53
Reply 16, posted (8 years 2 months 1 week 10 hours ago) and read 663 times:

Quoting Comorin (Reply 14):
In question 2, all I can think of is that if portfolios with the same duration have different convexities, then for anything more than a small delta in rates, they will end up with different values.

Hehe...that is what I said actually, that they would have to have different convexities.

Quoting Comorin (Reply 14):
I note that you were fortunate in not having to calculate the OAS on a callable bond !

Actually needed that work done for my masters project but avoided doing it! I had a bunch of data on corporate bonds but they all had different optionalities. It ended up being a bunch of interest rate path simulations or something, not sure, didn't do it myself.

Quoting Comorin (Reply 14):
Anyway, it's over now. Time for you to enjoy real life, and time for me to get back to Sudoku!

Still got two more Sad Trading and financial history. Had fixed income today, macro yesterday, derivatives on Monday. Almost done - final stretch. Enjoy Sudoku.

Quoting AeroWesty (Reply 15):
t's all jumbled as it is.

The professor is Greek  Wink



PARIS, FRANCE...THE BEIRUT OF EUROPE.
User currently offlineAeroWesty From United States of America, joined Oct 2004, 20563 posts, RR: 62
Reply 17, posted (8 years 2 months 1 week 10 hours ago) and read 662 times:

Quoting AirxLiban (Reply 16):
The professor is Greek

I'd be interested in the right answer. I don't even think duration was used properly in this context.



International Homo of Mystery
User currently offlineAirxLiban From Lebanon, joined Oct 2003, 4511 posts, RR: 53
Reply 18, posted (8 years 2 months 1 week 9 hours ago) and read 660 times:

I think I copied it directly out of the exam paper. I believe the answer is that they have to have different convexities. Are you referring to duration in the dictionary sense or in the economic sense?


PARIS, FRANCE...THE BEIRUT OF EUROPE.
User currently offlineAeroWesty From United States of America, joined Oct 2004, 20563 posts, RR: 62
Reply 19, posted (8 years 2 months 1 week 9 hours ago) and read 658 times:

Quoting AirxLiban (Reply 18):
Are you referring to duration in the dictionary sense or in the economic sense?

In the economic sense. Duration could refer to maturity. It should be worded clearly, unless there's a specific definition of duration they're teaching. Simply stating duration doesn't say whether the portfolios were started at the same time or not, just that they have the same length of time as a property.



International Homo of Mystery
User currently offlineComorin From United States of America, joined May 2005, 4896 posts, RR: 16
Reply 20, posted (8 years 2 months 1 week 8 hours ago) and read 652 times:

Quoting AeroWesty (Reply 17):
I don't even think duration was used properly in this context.

Why do you think so?  Confused Portfolio Duration is the weighted sum of each component asset's Modified Duration which is a measure of interest rate sensitivity of the portfolio as a whole. Apart from the minor grammar error, duration was used correctly in this context. You may be thinking of simple duration (term of equivalent zero-coupon bond), in which case you would be right, but it's not what bond traders refer to when they talk about duration.

Lord Macaulay, the originator of the Macaulay Duration measure, taught at Cambridge. Hopefully, AirxLiban's professor at Oxford should also know a thing or two about the subject...  Wink


User currently offlineAeroWesty From United States of America, joined Oct 2004, 20563 posts, RR: 62
Reply 21, posted (8 years 2 months 1 week 8 hours ago) and read 650 times:

Quoting Comorin (Reply 20):
Portfolio Duration is the weighted sum of each component asset's Modified Duration which is a measure of interest rate sensitivity of the portfolio as a whole. Apart from the minor grammar error, duration was used correctly in this context.

That's why I qualified it with:

Quoting AeroWesty (Reply 19):
unless there's a specific definition of duration they're teaching.

Remember, I'm just reading the question without knowing what's been taught in the class, and the balance of the question had a grammatical error.



International Homo of Mystery
User currently offlineComorin From United States of America, joined May 2005, 4896 posts, RR: 16
Reply 22, posted (8 years 2 months 1 week 8 hours ago) and read 635 times:

Quoting AeroWesty (Reply 21):
Remember, I'm just reading the question without knowing what's been taught in the class, and the balance of the question had a grammatical error.

Sorry if I sounded like a know-it-all! I've learned so much from a.net, and I just wanted to 'give back' on a topic I deal with everyday.

 Smile


User currently offlineAeroWesty From United States of America, joined Oct 2004, 20563 posts, RR: 62
Reply 23, posted (8 years 2 months 1 week 7 hours ago) and read 633 times:

Quoting Comorin (Reply 22):
Sorry if I sounded like a know-it-all! I've learned so much from a.net, and I just wanted to 'give back' on a topic I deal with everyday.

That's okay, I thought it was kind of funny when you mentioned bond traders, since I did arbitrage and made a market in zero coupon convertible bonds (among others) as the lead trader for a Wall Street firm in the past. That gave me a clue about where the test question was coming from.

Never a problem with asking questions and getting thoughtful answers here.



International Homo of Mystery
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