Sample Questions
Question 1
Easy
The Solow residual in growth accounting represents:
Solution
C is correct.
The Solow residual is calculated as the difference between total GDP growth and the weighted contributions of capital and labor growth. It represents total factor productivity (TFP) growth—the portion of economic growth attributable to factors other than increased quantities of inputs. These factors include technological progress, improvements in education and workforce skills, better institutions, economies of scale, and improved resource allocation.
The Solow residual is calculated as the difference between total GDP growth and the weighted contributions of capital and labor growth. It represents total factor productivity (TFP) growth—the portion of economic growth attributable to factors other than increased quantities of inputs. These factors include technological progress, improvements in education and workforce skills, better institutions, economies of scale, and improved resource allocation.
Question 2
Medium
The Dutch disease phenomenon refers to a situation where:
Solution
B is correct.
Dutch disease describes the economic phenomenon where a surge in natural resource revenues (such as oil or gas) leads to appreciation of the domestic currency. The stronger currency makes the country's non-resource exports (particularly manufactured goods) more expensive in international markets, reducing their competitiveness. The manufacturing sector contracts as a result, creating an economy that becomes overly dependent on the resource sector. The term originates from the Netherlands' experience after discovering natural gas in the 1960s.
Dutch disease describes the economic phenomenon where a surge in natural resource revenues (such as oil or gas) leads to appreciation of the domestic currency. The stronger currency makes the country's non-resource exports (particularly manufactured goods) more expensive in international markets, reducing their competitiveness. The manufacturing sector contracts as a result, creating an economy that becomes overly dependent on the resource sector. The term originates from the Netherlands' experience after discovering natural gas in the 1960s.
Question 3
Hard
Based on the vignette quotes, the trader's most appropriate triangular arbitrage decision is:
Solution
C is correct.
GBP can be acquired for CHF by two routes, and the arbitrage is to source it on the cheaper route and sell it on the dearer one.
Put both routes into USD per GBP so they are directly comparable. The direct market quote of 1.3950 CHF per GBP converts at the USD/CHF spot of 0.9000 USD per CHF:
The route through the dollar buys GBP at the quoted USD/GBP spot of 1.2500 USD per GBP.
Because , GBP is cheaper through the dollar than in the direct CHF/GBP market. The trade is therefore to start with CHF, buy USD, use the USD to buy GBP, then sell that GBP for CHF in the direct market. The locked-in gain is USD per GBP transacted.
The three LIBOR rates are not used here. Triangular arbitrage is executed simultaneously in the spot market, so no time passes and no funding is required.
GBP can be acquired for CHF by two routes, and the arbitrage is to source it on the cheaper route and sell it on the dearer one.
Put both routes into USD per GBP so they are directly comparable. The direct market quote of 1.3950 CHF per GBP converts at the USD/CHF spot of 0.9000 USD per CHF:
The route through the dollar buys GBP at the quoted USD/GBP spot of 1.2500 USD per GBP.
Because , GBP is cheaper through the dollar than in the direct CHF/GBP market. The trade is therefore to start with CHF, buy USD, use the USD to buy GBP, then sell that GBP for CHF in the direct market. The locked-in gain is USD per GBP transacted.
The three LIBOR rates are not used here. Triangular arbitrage is executed simultaneously in the spot market, so no time passes and no funding is required.
