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# Inspired by a wave of uncertainty about currencies in several emerging

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Senior RC Moderator
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Inspired by a wave of uncertainty about currencies in several emerging  [#permalink]

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22 Jan 2019, 10:15
Question 1
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based on 31 sessions

86% (02:25) correct 14% (01:45) wrong

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Question 2
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based on 25 sessions

30% (01:54) correct 70% (01:13) wrong

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Question 3
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58% (01:20) correct 42% (01:00) wrong

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Inspired by a wave of uncertainty about currencies in several emerging markets in recent years, many investment banks are beginning to market their versions o fa new investment tool designed to predict when a currency’s value will decline sharply. Many academics and economists have combined their efforts to create these “risk indicators” in order to predict when financial turmoil in a nascent capitalist market is forthcoming.

Creators of this new model define a currency crisis as a drop of at least 10 percent in a currency’s real value. Working with a list of all of the currency crises that have occurred within the past ten years, researchers suggest a number of market or economic variables that may have helped bring the crashes about. Such factors include a country’s exchange-rate overvaluation, slowing economic growth, or a rising debt burden. Statisticians then use sophisticated econometrics to look for relationships between these factors and the currency dips they may have caused.

Representatives of the International Monetary Fund (IMF) question whether these new models are any improvement over the techniques that are currently in place. The risk indicators, the IMF argues, are too dependent on the benefit of hindsight and cannot account for any new economic phenomena that may arise. The IMF has also accused some of the investment banks of “data mining,” whereby analysts configure the information they cull from various sources until they finally verify the conclusion they have conditioned themselves to seek.

Further skepticism has been fueled by a comparison study of the risk indicator models, which was convened by Andrew Berg and Catherine Pattillo, a pair of IMF economists. After funneling economic data through each of the three most prominent models, Berg and Pattillo determined that none would have accurately predicted Asia’s currency freefall that began when Thailand’s baht was dislodged from its American dollar standard in July 1997. In fact, two models would have sounded a more severe alarm toward the Philippines, which has not undergone a currency crisis, than for either South Korea or Thailand, whose respective recoveries may never be complete.

1. The passage is chiefly concerned with

A. warning that attempting to predict currencies fluctuations is a useless enterprise
B. advocating the indispensable role of the IMF in stabilizing the currencies of countries to which capitalism is relatively new
C. expressing doubts as to the reliability of some new attempts to predict financial phenomena
D. contrasting new and sophisticated financial models with older methods that are more concerned with careful research
E. recommending that better investor models be created before one isolated contagion leads to worldwide recession

2. Which of the following does the passage suggest about South Korea?

A. It has received financial consultation and support from the IMF.
B. Its currency recently devalued by more than 10 percent.
C. Its economy is currently growing slower than that of the Philippines.
D. The new risk indicators would have detected its economic downturn had they been in place several years ago.
E. Its currency is closely tied to the American dollar.

3. Which of the following, if it happened soon after this article was published, would undermine the skepticism toward the viability of the “risk indicator” models?

A. The value of the Filipino peso plummeted.
B. Berg and Pattillo resigned from the IMF.
C. The South Korean economy showed signs of slowing down further.
D. Thailand restored its connection to the American dollar.
E. The IMF changed its definition of a currency crisis to an 8 percent drop in value.

14

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Re: Inspired by a wave of uncertainty about currencies in several emerging  [#permalink]

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23 Jan 2019, 02:20
4 mins to all correct. A good read.

1. The passage is chiefly concerned with
A. warning that attempting to predict currencies fluctuations is a useless enterprise Too severe as the IMF only warns for inaccuracy in the new models suggested at the start but does not state that the effort is a "useless enterprise"
B. advocating the indispensable role of the IMF in stabilizing the currencies of countries to which capitalism is relatively new Not the point being discussed. Out of scope.
C. expressing doubts as to the reliability of some new attempts to predict financial phenomena Perfect. The passage starts with describing new models (new attempts) for predicting the crash of foreign currency (financial phenomenon) and ends with IMF showing the inaccuracy ( and hence doubts) in those new models.
D. contrasting new and sophisticated financial models with older methods that are more concerned with careful research TRAP - Not the point of the passages. A means to an end. So this cannot be the main point. Discard.
E. recommending that better investor models be created before one isolated contagion leads to worldwide recession The IMF stops just short of such a recommendation and the main bulk of the passage deals with the inaccuracies of the new models. Tangential at best.

Tricky one as the passage was probably written around 1997 and there is no mention of this fact. However, when the passage talks about new studies with respect to the 1997 crash of Thailand's currency - we can make this assumption.
2. Which of the following does the passage suggest about South Korea?
A. It has received financial consultation and support from the IMF. Out of scope.
B. Its currency recently devalued by more than 10 percent. Perfect - keeping the caveat above in mind.
C. Its economy is currently growing slower than that of the Philippines. Again, the economy didn't crash the value of the currency did. And even if the two are related to a crashed economy does not necessarily grow slower (it could grow faster if there was a recovery) so this cannot be inferred.
D. The new risk indicators would have detected its economic downturn had they been in place several years ago. 180 opposite of what is being suggested in the passage.
E. Its currency is closely tied to the American dollar. Again, this is speculative as there is no direct mention of South Korea's currency but that of Thailand's.

The IMF uses the fact that the models suggested Philippines currency would crash but it did not as a weakness of the model - so to go against that claim, if the currency did in fact crash - maybe the model is not that weak afterall.
3. Which of the following, if it happened soon after this article was published, would undermine the skepticism toward the viability of the “risk indicator” models?
A. The value of the Filipino peso plummeted. Perfect - a sweet question with a direct answer.
B. Berg and Pattillo resigned from the IMF. Out of scope.
C. The South Korean economy showed signs of slowing down further. Again, opposite of what the model predicted so does not work.
D. Thailand restored its connection to the American dollar. Again, discard for same reason as above.
E. The IMF changed its definition of a currency crisis to an 8 percent drop in value. IMF definiton has got nothing to do with the model. Discard.

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Re: Inspired by a wave of uncertainty about currencies in several emerging  [#permalink]

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13 Feb 2019, 09:06
Easy Passage! Took 6 min in total including 3:15 min to read the passage.

Passage Map:

1) Tool to predict
2) Model, Variables, Factors
3) Tool any good? 2 Issues
4) Skepticism about the tool. Comparison of tools
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Re: Inspired by a wave of uncertainty about currencies in several emerging   [#permalink] 13 Feb 2019, 09:06
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