Saul Bertram, CFA is employed by Treadstone capital; a global macro hedge fund which takes betson securities and fixed income instruments in emerging markets. Saul is responsible for the hedge funds' fixed income strategy and is currently looking into the possibilities of an investment in the sovereign bonds in a region which had been previously marked by intermittent military confrontations. Subsequent to the seizure of hostilities between the states in the region, analysts are optimistic of an accelerated growth in the post-war scenario. Saul has narrowed his search down to three countries in the region; Country A, Country B and Country C. Saul's ultimate decision would be conditional on expected inflation rates and the credit ratings of the economies. To get a sense of the potential GDP growth prospects for the region, Saul made use of the firm's financial services terminal to obtain data for a cross sectional analysis.

The raw data obtained is summarized below:

Exhibit 1
Economic Statistic	Country A	Country B	Country C
GDP Growth (2006-2011)	6.4%	3.5%	10.1%
GDP/ Capita, 2011	USD1,820	USD6,180	USD4,130
% growth in earnings to GDP ratio(2006-2011)	5%	10%	15%
12M- trailing P/E ratio	1.2	0.8	1.4

Saul passes on the above data to his Colleague Ash Quesada, CFA who heads the equityinvestments for Treadstone Capital.

Saul also obtains 5-year forecasts for GDP growth for the three countries from the IMF's latesteconomic outlook for the region. The IMF expects a potential GDP growth rate of 3.2%, 5.5% and 7.8% for Countries A, B and C respectively. The report also reveals information on the impact the conflict has had on the labour dynamics of the three countries. Saul made notes of the findings and summarized the key findings he believes will impact the potential GDP growths of the economies over the next 5 years.

Exhibit 2

The intelligentsia and professionals who fled Country A to the west due to the conflict are unlikely to return to their home country over the next decade.

The labor force of Country A has been significantly affected by the vast casualties suffered by the countries armed forces which comprised mostly of conscripted youth between the ages of 18-35

Country B has an extensive welfare program with a particular focus on improving the livelihood of rural women through micro credit schemes and day care centres for children.

The government of Country B has offered unconditional amnesty to the rebel youth groups involved in the conflict and hopes to employ them in the large scale infrastructurereconstruction projects

Three days later, while at a bar in a trendy neighborhood, Saul met by chance a senior official from the minister of finance of Country B, who was attending a donor conference in Saul's country. Striking up a conference with Saul, he elaborated on the 5-year development plan rolled out by the government at the beginning of the year. He stated that:

Statement 1:

"The government has identified infrastructure redevelopment and investment in ICT as vital foraccelerated economic growth and improving social mobility. Further in order to encourage domestic agricultural production, tariffs will be levied on the importation of agricultural produce and minimum guaranteed prices would be provided for domestic farmers".

To wrap up their conversation, Saul turned to the debate of convergence and asked for the official's opinion on where he stood on the matter. The official responded as follows:

Statement 2:

"I believe that developing countries have the potential to equal per capita output of developedcountries over time regardless of the differences in resource endowments and structural

characteristics."

Based on the data in Exhibit 1 and the IMF's growth forecasts, which country is most likelyto experience an increase in inflation over the next five years: CBA

A. Country A

B. Country B

C. Country C

Based on the data in Exhibit 1 and the IMF's growth forecasts, over the next 5 years, CBA country A's credit rating is most likely to be:

A. Upgraded

B. Downgraded

C. Remain unchanged

Based on the data in Exhibit 1, the % growth in earnings to GDP growth in Country C ismost likely to: CBA

A. Rise over time

B. Fall over time

C. Remain unchanged over time

Based Solely upon Saul's observations in exhibit 2, growth rate of potential GDP over thenext five years is most likely to: CBA

A. Higher for Country A, Lower for Country B

B. Higher for Country B, Lower for Country A

C. Lower for both Country A & B

Based upon Statement 1, the policy decision which is least likely to improve per capita GDPin Country B is: CBA

A. Investment in ICT

B. Infrastructure development

C. Tariff on import of agricultural produce

Based upon Statement 2, the type of converge advocated by the official is best described as: CBA

A. Absolute convergence

B. Club convergence

C. Conditional convergence