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Chapter 6 (The present value is today's value of a future cash flow or…
Chapter 6
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When shocks are perfectly symmetric, risk cannot be eliminated by holding the world portfolio.
In an open economy, external borrowing is possible.
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When shocks are perfectly negatively correlated, they have a correlation of −1.
A perpetual loan is an interest-only loan or, equivalently, a sequence of loans for which only the principal is refinanced or rolled over every year.
In a closed economy, external borrowing is not possible.
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When shocks are perfectly asymmetric, the world portfolio has minimum volatility and it is equal to zero.
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When shocks are perfectly symmetric, the volatility of the portfolio is not affected by diversification.
Consumers can smooth out temporary shocks but they must adjust immediately and fully to permanent shocks.
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When output fluctuates, a closed economy cannot smooth consumption, but an open one can.
Sovereign wealth funds are state-owned asset management companies that invest some government savings overseas.
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The long-run budget constraint is the key constraint that limits a country's borrowing in the long run.
A sudden stop is when a borrower country sees its financial account surplus rapidly shrink and so the current account deficit also must shrink.