Answer 4 questions. Two questions MUST be A questions (political science;
I.A., II.A., or III.A.) and two questions MUST be B questions (economics;
I.B., II.B., or III.B.). In answering these questions students should demonstrate
an ability to integrate material from different courses and across disciplines.
The answer to each question, however, should be only 4 to 5 typewritten
pages (charts, diagrams, and endnotes are counted separately). All
sources of ideas or works that are not your own must be acknowledged in
the endnotes. Please contact the IPED Office for a detailed set of
instructions on how to format your answers.
PART I: ECONOMIC AND POLITICAL ANALYSIS
I.A. INTRODUCTION TO POLITICAL ANALYSIS
If you choose to answer question I.A., do ONLY Section 1 OR Section 2.
SECTION 1 -- COMPARATIVE POLITICAL ANALYSIS
Choose ONE question.
A) In what ways does the study of comparative politics enhance our ability to explain and predict political change in the Third World? Identify specific theoretical and empirical issues along with some country examples.
B) Compare and contrast the way in which democratic transition is understood and applied by Pzerworski, Dahl, and Inglehart. Which of the authors provides the most compelling argument and why?
C) Political culture and political economy compete as alternative theoretical
frameworks for explaing the persistence of authoritarianism in the Middle
East and North Africa. Provide a thorough argument in favor and against
each with reference to specific country cases.
SECTION 2 -- ANALYSIS OF INTERNATIONAL POLITICS
Choose ONE question.
A) Analysts often argue that a nation’s domestic social structure (and status quo) is what propels aggressive foreign policies and shapes the official view of the requirements of ‘national security’. What conceptual procedures and distinctions would you emphasize if you, as an analyst outside the government, were asked to explain those policies? What would be the prescriptive implications of different explanatory emphases?
B) Before ‘terrorism,’ ‘globalization’ was the buzzword of contemporary
international events. How much do the pressures and conflicts surrounding
globalization really differ from what we would expect to see from the results
of efforts to fulfill the reproduction requirements of the process of capital
accumulation on a global scale?
I.B. INTRODUCTION TO ECONOMIC ANALYSIS
If you choose to answer question I.B., do ONLY Section 1 OR Section 2 OR Section 3.
SECTION 1 -- ECONOMIC THEORY
In the following analysis assume that
[a] All countries are small and therefore internal changes in
these economies have no affect upon the world rate of interest.
[b] There is a free flow of capital.
[c] Investors do not require a risk differential when purchasing
debt instruments in another country.
[d] i euro is a proxy for the world rate of interest
and i US represents interest rates in the U.S.
I. Suppose the U.S. economy is below its full employment level of output, i US = i euro, and exchange rates are fixed.
A. Should the U.S. government increase its spending to raise the output level to one of full employment? (Consider the effects of this action on the IS curve, the LM curve, and the market for foreign exchange). What has been the effect on spending in each sector (consumption (C), investment (I), government spending (G), exports (X) and imports (M))?
B. Would the results differ if instead of an autonomous increase in government spending, a tax cut is introduced in the U.S. (assume a decrease in autonomous taxes)?
C. Instead of increasing government spending or decreasing taxes, what would be the effect on the U.S. output if the Federal Reserve supplies reserves to the banking system and the money supply increases?
II. Suppose the U.S. economy is below its full employment level of output, i US = i euro, and exchange rates are flexible.
A. Should the U.S. government increase its spending to raise the output level to one of full employment? (Consider the effects of this action on the IS curve, the LM curve, and the market for foreign exchange). What has been the effect on spending in each sector (consumption (C), investment (I), government spending (G), exports (X) and imports (M))?
B. Instead of increasing government spending or decreasing taxes, what
would be the effect on U.S. output if the Federal Reserve supplies reserves
to the banking system and the money supply increases?
SECTION 2 -- FINANCIAL ANALYSIS
Abco does not pay dividends, and it’s stock trades at $50/share currently.
You are offered the opportunity to buy a call option on this stock with
an exercise date in 1 year, and an exercise price of $52.50. You
know with certainty that in 1 year, the price of Abco shares will be either
$60, or $45, but you do not know which it will be. The rate at which
you can borrow is 12.5%.
a) Use a replicating portfolio approach (an alternative strategy
to achieve the same results) to calculate the fair price for the option
described above, clearly showing the steps you take.
b) Explain why this procedure is an example of “arbitrage”.
c) Derive the price of a put on Abco stock at an exercise price of
$52.50 and a time to expiration of 1 year, using the other information
in part (a), including your solution for the price of the call, using an
arbitrage argument.
d) Use the concept of arbitrage to explain why the beta of a stock
is so important to explaining its expected return in the Capital Asset
Pricing Model. Give a numerical example to illustrate your answer.
e) A 1-year zero coupon treasury bond yields 2% and a 2-year zero coupon
treasury bond yields 3% in the market today. Using the expectations
theory of the term structure, show what the expected 1-year forward rate
starting one year from now is, and explain why the formula is an arbitrage
argument.
f) Explain how the concept of arbitrage helps you understand
the relationship between today’s price of oil and today’s price of a futures
contract to purchase oil in 1 year. Give a numerical answer to illustrate
your answer.
g) Briefly summarize why the concept of arbitrage is so useful in finance,
and give at least one example other than the ones above.
SECTION 3 -- ECONOMETRICS
You are interested in examining two questions about juries: (i) Is the composition of juries representative of the adult population? (ii) Is the composition of juries representative of the pool of available jurors? Suppose that you have cross-sectional data on a random sample of 100,000 people from the United States. All of the people in the sample are age 45. The variables are:
J = number of times the individual has served on a jury during his or
her life (up to his or her current age of 45)
S = individual’s years of schooling
H = individual’s usual hours of work per week as an adult (this can
be equal to zero)
Dfemale= 1 if individual is female; 0 otherwise
DAfricAm = 1 if individual is African American; 0 otherwise
DHispanic = 1 if individual is Hispanic; 0 otherwise
DAsian ¬= 1 if individual is Asian; 0 otherwise
R = number of months since his or her 18th birthday that the individual
has been registered to vote
Suppose that all the individuals in your sample live in states where potential jurors are drawn from the list of registered voters. Therefore, the more months a person has been registered to vote (from the age of 18 to his or her current age of 45), the more chances the individual has had to be drawn for potential jury duty.
If you are unfamiliar with the US jury system, you will need to know that not all potential jurors (the jury pool) are assigned to jury duty. Lawyers can object to certain people in the pool and prevent them from being on juries. Other potential jurors maybe relieved of jury duty if they claim certain hardships.
a. Explain briefly why the answers to questions (i) and (ii) are different and why the answer to each of the two questions could be useful.
b. Set up the regression equation that you would use to answer the first question. Which parameters would you look at in order to answer it?
c. Set up the regression equation that you would use to answer the second question. Which parameters would you look at in order to answer it?
d. Some states have “motor-voter” laws, whereby voter registration automatically occurs when a person gets a driver’s license. As a result, motor-voter states draw their potential jurors from the list of all the people who have driver’s licenses. Suppose that some of the 100,000 people in your sample are from states that have motor-voter laws and the rest are from states that have traditional voter registration lists that contain only the people who show up at a government office.
The data has an additional variable: DMotor-Voter = 1 if the individual
is from a motor-voter state; 0 otherwise. Set up the equation that
would allow you to examine the question, “Do motor-voter laws change the
ways in which juries are non-representative of the adult population?”
Which parameters would you look at to answer this question?
PART II: INTERNATIONAL ECONOMIC RELATIONS
II.A THE POLITICS OF GLOBAL ECONOMIC RELATIONS
Choose ONE Question.
A) What explains the trend toward regionalism in both trade and currency matters? What implications does this trend have for the future of the international economy?
B) In accounting for the failure of the developing world over the past
fifty years to close the economic gap with the developed countries, analysts
have pointed to: a) structural features of the international economy, b)
international regimes governing economic relations, and c) policies pursued
by developing country governments themselves. Which, if any, of these
arguments do you find most persuasive and why?
II.B. INTERNATIONAL ECONOMICS
If you choose to do II.B. answer only Section I or Section II.
SECTION I -- INTERNATIONAL ECONOMIC POLICY
A) Looking in isolation at one industry (partial equilibrium) that faces import competition, prove that protectionism will reduce social welfare and then explain why such a socially harmful policy is likely to be implemented in a political system that responds primarily to interest groups. (Formal geometrical proofs are required.) How does rent seeking increase the the cost of protectionism?
B) Now consider the case where there is not only one industry that faces import competition but another industry that seeks to export its products (general equilibrium). Prove that protectionism will still reduce social welfare but explain how under a non-cooperative Nash equilibrium there is likely to be an effective political opposition to protectionism in a political system that responds primarily to interest groups. (Formal geometrical proofs are required.)
C) Part C is optional. As a continuation of part B derive the possible effects that directly unproductive profit seeking (DUP) may have on the country's welfare.
D) Part D is optional. A key criticism leveled against these models is their depiction of the government as a passive referee caught between competing interest groups. How might these models and their implications change if we incorporated the fact that governments are agents who choose policies in order to maximize their own political objectives?
SECTION II -- INTERNATIONAL MONETARY POLICY
Three generations of currency crisis models.
A) What are the differences and similarities between the three generations of currency crisis models [1st generation: Krugman (1979), Flood and Garber (1984); 2nd generation: Obstfeld (1984); 3rd generation: Chang and Velasco (2001)]? Explain briefly.
B) In 1992, the European Monetary System (exchange rates of several
European countries were fixed versus each other) was in crisis and several
countries had to devalue their currencies against the Deutsche Mark. Explain
with the help of the Obstfeld model, how high European unemployment rates
may have triggered this crisis.
PART III: DEVELOPMENT ISSUES
III.A. POLITICAL ECONOMY OF DEVELOPMENT
Critically analyze the following four theoretical frameworks of development:
modernization, dependency, post-structural, and capabilities. In so doing,
explain the theories, discuss the strengths and weaknesses of the frameworks,
and explain which theoretical framework you find most helpful in your attempts
to understand development in the global south.
III.B. ECONOMIC DEVELOPMENT
If you choose to answer question III.B., do ONLY Section 1 OR Section 2.
SECTION 1 -- ECONOMIC DEVELOPMENT POLICY
A) Select only two of the following policy issues: employment policy,
trade policy, growth policy, population policy and foreign aid policy.
Then show with formal geometrical proofs why the key economic theories
that dominated development thinking after World War II argued strongly
in favor of capital formation and industrialization usually with heavy
government intervention.
B) Summarize the key criticisms of these theories that developed since
the 1970s which led to liberalization and a more limited role for the government
in the 1990s.
C) Part c is optional. According to recent studies on foreign
aid (Sachs, Easterly, World Bank), what is the proper role of government?
How is this research related to current foreign aid policy, namely the
UN's Millennium Development Goals versus the US Millennium Challenge Account?
SECTION 2 -- STABILIZATION POLICY
A new peace accord, natural disasters or HIV/Aids related foreign assistance can generate a surge in foreign aid inflows well in excess of 30% of GDP.
(a) Discuss the options aid receiving governments have for spending or “saving” aid inflows, using the “spend” and “absorb” terminology of the aid effectiveness literature (see for example Gupta, Powell and Zang (2006) Box 1 or Elbadawi et al., 2007, pp. 1-5). Most donors want aid spent on projects or direct budget support (more recently), how can governments “get around” these conditions and “save” some aid if they want to? Why would governments want to save rather than spend or absorb all aid as it arrives?
(b) One risk of large aid inflows is the Dutch Disease or a sharp appreciation of the real exchange rate: show this impact of aid inflows using the standard TNT diagrams. Why is this potentially a problem for the poor in many African countries, Uganda and Rwanda for example?
(c) Why is the Dutch Disease less likely to be a serious problem with HIV-Aids targeted foreign aid, especially aid oriented toward ART over the medium term? Show how aid inflows might cause an exchange rate depreciation using the standard TNT diagram [hint: What component of aid-driven spending generally causes an exchange rate appreciation? Tornell, Westerman and Martinez (2004) suggest some types of capital inflows are less likely to cause an exchange rate appreciation, the argument regarding the impact of aid flows on the RER is analogous to their argument, but focused on Aid inflows].
(d) (Optional part) What has been the actual experience of African countries with the Dutch Disease? (see Elbadawi et al., 2007, pp. 17-18 and Figure 3) Note that Mozambique did not experience an RER appreciation, but El Salvador did (though it was caused by remittances not aid). What has been the consequence for economic growth and poverty reduction in these two countries? (see for example Hausmann and Rodrik, 2003 and Arndt et al. 2006 below).
References
Gupta, Sangeev, R. Powell and Y. Yang (2006) Macroeconomic Challenges of Scaling up Aid to Africa, A checklist for Practitioners, IMF, Washington DC. http://www.imf.org/external/pubs/ft/afr/aid/2006/eng/aid.pdf
Haacker, M. (2004) The Macroeconomics of HIV/AIDS, IMF, Washington D.C.
http://www.imf.org/external/pubs/ft/aids/eng/
Tornell, Westerman and Martinez (2004)
http://www.gdsnet.org/classes/TornellWestermanMartinezNBER10293.pdf
Elbadawi, I. A., Kaltani, L & K. Schmidt-Hebbel (2007) “Post-Conflict Aid, Real Exchange Rate Adjustment, and Catch-up Growth”, World Bank Policy Research Working Paper 4187, http://go.worldbank.org/PI1GZKJ2B0
Hausmann, R and D. Rodrik (2003) Discovering El Salvador’s growth potential http://ksghome.harvard.edu/~drodrik/elsalvador.pdf
Arndt, C., Sam Jones and Finn Tarp (2006) “Aid and Development: The
Mozambican Case” University of Copenhagen, Department of Economics, Discussion
Paper 06-13, http://ideas.repec.org/p/kud/kuiedp/0613.html