Briefly indicate what the Okun law is, and a factor that is likely to make it more linear in a country than in another. The Okun law is the observed relationship between a country’s GDP growth and the unemployment rate. Factors that will make it more linear in a country than in another include a flexible labor market and a diversified economy. Briefly explain what a central bank’s RRR is. RRR stands for Required Reserve Ratio. It is the portion of bank reserves (in fact, calculated as a % of deposits) that cannot be lent to customers and must be kept as required reserves at the central bank. When the current account deficit is smaller than the government deficit, does it mean that domestic private investment is larger or smaller than private saving? Smaller Briefly explain why a country with a positive NIIP can nonetheless have a negative primary income. A negative NIIP means that the country’s residents have less cross-border assets than cross-border liabilities. A positive primary income means that the country’s residents receive more income on their cross-border assets than what they pay on their cross-border liabilities. This is possible if the average payment rate on liabilities is lower than the average return rate on assets. What kind of shock causes cost-push inflation in the AS-AD model? Demand or supply? Positive or negative? Negative supply shock Indicate the equation of the balance of payments CA + CapA = FA Or Goods balance + Services Balance + Primary income + Secondary income + Cap A = FDI + Portfolio + Derivatives + Other + Errors & Omissions + Reserves & IMF ...or any intermediate breakdown between the two. Inflation is negative in country A and positive in country B. Assuming relative PPP holds between the two countries, which country’s currency depreciates vs. the other? Country B’s currency A company in Slovakia employs only Slovak residents but is entirely owned by a group whose shareholders are all Swiss residents. The profits generated by this company contribute to the GDP of... Slovakia The employees’ wages contribute to the GDP of... Slovakia The profits generated by this company contribute to the GNP of... Switzerland The employees’ wages contribute to the GNP of... Slovakia Is domestic currency an asset or a liability of the domestic central bank? A liability Indicate 3 factors that increase the probability of success or survival of a monetary union, according to the “Optimal Currency Area” theory. Mobility of production factors, Structural commonality and sectoral diversity, Trade openness of member states, Solidarity mechanisms between members, Homogeneous preferences between members, Belief in a common destiny. Briefly indicate why a country’s “core” or “basic” balance (within the balance of payment) matters to domestic traders. A country’s core or basic balance indicates to what extent a country’s current account imbalance is financed by volatile (i.e., non-FDI) investment flows. Come a negative newsflow, these investment flows may quickly dry up, causing a sharp depreciation of the country’s currency (i.e., excess supply of the currency at its initial value, meaning the forex market will clear at a lower value).