0. Macro Flashcards

Question

Application of economic theories

Answer 1

Economic theories are implemented by politicians not economists two barriers to pure application 1.political compromise 2.open vs closed economies - closed = less dependent on foreign trade/investment Keynesian policies adopted during times of low international trade - increased globalization/more international trade/dependency on international trade/funding deficits = reduced need for keynesian policies easier to adopt pureer forms of econ theory if economy is insulation from FX fluctuations '(e.g. eurozone)

Answer 2

PEAK - GDP grows rapidly + high levels of activity. Bis operating @ full capacity, low unemployment, inflationary pressures, deterioration in balance of payments, asset prices subject to bubbles - IR increased to dampen demand and inflation CONTRACTION - slump/deceleration - GDP typically contracts (or grows more slowly) due to demand reduction - unemployment increases -recession if GDP contracts for >2 consecutive quarters TROUGH - slowing ceases, economy hits a bottom from which recovery emerges -high unemployment, weal reatil sales, deflation -IR cut to boost the economy RECOVERY -expansion/acceleration - economy is growing - if this lasts long enough economy will enter a boom period

Answer 3

Gross domestic product (GDP) is the value of the finished domestic goods and services produced within a nation's borders. Gross national product (GNP) is the value of all finished goods and services produced by a country's citizens, both domestically and abroad GNIhas broadly replaced GNP

Answer 4

Microeconomics PC = theoretical representation of how a free market would operate where no one buyer/seller can influence price of a single homogeneous product PC firm operates in industry w/ infinite number of firms, each accepting market price of homogeneous product set by interaction of supply/demand PC generates normal profits i.e.e enough to cover total costs and remain competitive

Answer 5

* No one firm dominates * Firms do not face any entries to barriers * A single homogenous product is produced by all firms * There is a single market price and place at which all output produced by 1 firm can be sold * Infinite number of consumers * Perfect information about the product, price and firms’ outputs is available to all If one firm was earning ‘supernormal profits’, then other firms would enter the market, supply the good, and thereby drive down the availability of profits until the supply matched the demand and supernormal profits were eroded.

Answer 6

Occurs when comps gain market power allowing them to take advantage and create inefficiencies due to imperfect competition -i.e. artificially fixing prices and moderating output Monopoly = single market supplier of prod oligopoly = limited number of highly independent firms dominate the industry UK public utilities/ tech companies often operate @ near monopolies

Answer 7

Different degrees of knowledge available to parties in a transaction - e.g. borrower and lender (borrower has more info about their financial state than lender) can lead to frictions in labour market - fluctuations in unemployment and sluggish wage growth - employer cannot know how hard prospective employee will work information gaps lead to - adverse selection -inefficient resource allocation -incorrect setting of prices =and therefore can lead to market failure

Answer 8

Firms maximise profit by producing @ level of output where marginal costs are equal to marginal revenue - firms will produce additional unit where extra rev generated by sale =cost of production output must exceed production costs to make normal profit as firms productive capacity increases - they can benefit from economies of scale - lowering costs and making production more efficient production cost minimised @ MES (min. efficient scale) beyond this point = diseconomies of scale may be caused by lack of space for employees to work at max capacity e.g.

Answer 9

= the spreading of events occuring in one market to another - increased by interconnectedness of world economies (supply chains, tech, travel etc) - causes systemic risk in financial system -e.g. widespread run on US banks in 1930s after wall street crash had worldwide impact - liquidity crisis that started in 07 and became a GFC low income countries - e.g EM = less likely to be able to expand fiscal spending due to tighter financing constraints, may have limited scope to loosen monetary policy -w/out supportive measures bis cycle is likely to shift rapidly from growth to flat as country enters recession = hard landing Higher inc countries = can finance larger deficits, greater scope to loosen monetary policy and more QE - can lessen negative consequences and lead to soft landing

Answer 10

assuming investors know where in cycle the economy is and the extent to which the sector is operationally geared to the cycle - doesnt provide latitude for sudden events that may spark sudden flight between asset classes

Answer 11

Sector -cyclical vs defensive -energy, services, staples, utilities etc Size - larger companies may have extra financial cushion to help during tough economic times -typically SMIDS fare worse in recession as are less liquid and may be less financially resilient - tho they bounce back faster as more nimble and grow more rapidly in recovery Debt levels -highly indebted comps may more more vulnerable - as they have to continue to service debt even if profits are weak -diverts profits from reinvestment - also may suffer is debt isnt fixed and rates are rising -low levels of debt tolerate weaker periods of profitability better

Answer 12

Value - typically 'old economy' (mining, oil, gas) that tend to pay out more of earnings as divi vs reinvesting -pay high divi -relatively immune to rising rates as investors place more emphasis on earnings generated today Growth -rapidly expanding industries - strong future earnings growth -Low/no divi, profits reinvested for expansion -underperform in high rate environments as more emphasis is on LT prospects which may be eroded by inflation - worse if highly indebted

Answer 13

CAPITAL MARKETS - Raising and investing LT capital (>1 yr) Primary markets - issuance of new secs (IPO. loan stock, bonds) Secondary markets - To allows trading of secs that have already been issued, and provide liquidity to capital markets MONEY MARKETS - raising ST (<1 yr) capital - liquidity and short term funding -largely decentralized network of interconnected wholsesale markets - primary network = interbank market (wholesale funding between banks on v ST basis) - SONIA, SOFR or TONA rates of interest

Answer 14

-Interrelated and interconnected nature of bis and financial systems - How prods/servs/lifestyles are becoming increasing similar around the world 2 orgs that have helped globalization WTO - aim = liberalization of trade laws between countries through use of global multilateral agreements - forum for govs to negotiate OECD - org for economic coop and dev - aims to help contribute to world trade and support sustainable economic world growth good - enables poorer countries to participate in international trade bad - loss of national identities, rise of multinationals with huge size beyond control of gov/reg

Answer 15

-outsourcing staff functions overseas - result of fast/efficient telecomms - fewer branches with centralized functions -offshoring of staff functions to overseas centres where appropriately skilled labour is cheaper - cross border businesses -accelerated by COVID

Answer 16

CPI - lower - Historically HICP in Europe - measures change in fixed set of goods (basket depends on economy) - Geometric average - weighted avg price change by importance of good - excludes housing costs, includes unit trusts/uni accom/stockbrokers - all households CPI-H = CPI + owner occupier housing costs CPI- Y = CPI - indirect taxes CPI - CT = CPI with contract indirect tax rate RPI - higher - 700 goods and services - arithmetic avg -includes mortgages and rent payments -excludes highest earners and pensioners households RPI-X = RPI - mortgage repayments (which reflect base rate used to control inflation) RPI - Y = RPI - mortgage repayments and VAT

Answer 17

US - CPI-U – all urban consumers - CPI-W – urban wage earners and clerical workers Hong Kong  CPI (A) – low expenditure households  CPI (B) – medium expenditure households  CPI (C) – high expenditure households

Answer 18

Purchasing price index - measures change in prices going into production process - including raw mats and other inputs 3 main areas of classification - commodity PPI = changing costs of input mats (crude goods); iron ore, wheat, soy beans - Stage of processing PPI - changing costs of prices in intermediary stages of production (refined sugars, leather, paper, chemicals) -Core PPI - finished goods (shoes, soap, furniture) - this is the most watched viewed as an earlier predictor of inflation than CPI as tracks price changed before goods reach consumer - changes in raw mat price tend to be passed on to consumer Output (or factory-gate) prices measure the changes in the price of goods as they leave the production process and enter the retail sector. There is obviously a very strong relationship with input price

Answer 19

Demand pull = traditional based on classical views of supply and demand. Demand outstrips supply, causing prices to rise. traditional remedy is to deflate demand by fiscal/monetary policy Cost push = increase in prices of factors of production - costs passed on to consumer in higher prices for final goods (2022 Russian invasion) Imported inflation = increase in imported goods leading to decline in external value of currency - may need to manage exchange rates (tho increasingly accepting govs cant really set FX rat) Monetary = caused by excess money supply

Answer 20

Procyclic - rise in period of economic expansion - GD, rate of growth of consumer spending, employment, investment Countercyclic - move in opp direction of economic growth trend - unemployment Acyclic - no relation to growth phases of economy and not useful for forecasting

Answer 21

Leading - change before economy, useful short term predictors - stock market, PMI, index of consumer confidence. building permits, money supply Lagging - change after economy (typically a few quarters) - unemployment, CPI, interest rates Coincident - change @ same time as economy - GDP, retail sales, personal income

Answer 22

Purchasing manager's index index of prevailing direction of econ trends in manufacturing and service sectors - derived from monthly questionnaires from private sector comps -identify MoM changes in range of areas - bis output, employment, costs, selling prices, purchasing activity etc (-1 to +1 score index reading 50 = no change index reading >50 = improvement <50= decline

Answer 23

most critical stat is level on unemployment (i.e. no. of people seeking employment but unable to find work influences investor sentiment and consumer confidence 3 types - Structural = mismatch between jobs avail and skill level of unemployed - frictional - result of people moving between jobs (resignation, seasonal, termination) -cyclical =result of downturns in economic cycle

Answer 24

compares inflows and outflows of all exports and imports to provide a balance - positive balance = more money flowing in -negative balance = more money flowing out 3 accounts must balance collectively CURRENT ACC (balance of trade) - imports and exports -ST flows of money in and out -visibles (products) -invisibles (services) CAPITAL ACC - financial transactions not affecting income, production or saving e.g. copyright FINANCIAL ACC - transactions for increases/decreases in the ownership of assets +balancing item - to correct any statistical error and ensure accounts balance

Answer 25

BoP deficit (or surplus) is a deficit (or surplus_ on the current account deficit = imports exceed exports - will need to be corrected over LT as foreign investors will not finance the deficit indefinitely small neg balance - can run down reserves (cannot do this indefinitely) borrow to finance deficit - also wont work forever as greater servicing requirements can allows currency to fall in value to rectify = imports become more expensive and exports become relatively cheap financing with debt can create concerns about stability of econ - so gov raises rates to prevent outflow of funds. higher rates encourage foreign investment which strengthens the currency which is obvs at odds with trying to manage curr acc deficit

Answer 26

PURCHASING POWER PARITY Econ theory - states that exchange rate between 2 currencies is in equilibrium when their domestic purchasing powers are equivalent i.e. if big mac if 5 USD and 5USD is 4GBP then big mac should be 4GBP compares economic productivity and standards of living between countries Drawbacks - tax differences -tariffs on imported goods Nominal GBP values can be misleading because currencies may be manipulated. GDP by PPP allows a fairer comparison of GDP between countries with different currencies

Answer 27

Fixed (pegged) exchange rate system = exchange rate fixed against another currency (e.g. USD) to maintain - gov must have lots of foreign currency reserves to actively intervene in markets most attempts at fixed systems have baso failed Floating exchange rate system = currencies allowed to float freely in market and find its own level some pegged to USD and some pegged to a balance of currencies = crawling peg

Answer 28

if currency appreciates = worth more in terms of foreign currency - exports become more expensive (so fewer goods demanded) -exports go down/contraction in demand -imports become cheaper and demand increases -aggregate demand falls, leading to lower growth -inflation falls - cheaper prices for imported goods, lower agg demand and less demand pull inflation

Answer 29

depreciation in floating rate system devaluation in fixed rate system = fall in value of currency - more competitive exports, increased demand -more expensive imports, reducing demand - higher growth and rising agg demand -potential increased inflation due to increased agg demand and demand pull inflation -more expensive imports can cause cost push inflation -improvement in curr acc balance of payments

Answer 30

= foreign currency held in significant quants by gov/central bank/major financial instit used for international transactions/investments major reserve currencies are USD, euro, Yen, CHF, GBP, yuan, AUD and CAD attractive = proven track record od stability, well developed market to dispose currency in with wide acceptability

Answer 31

dominated by international trade - purchasing overseas assets -foreign currency needs of travellers no central marketplace - international network of major banks and currency dealers 24hr market - 4 major trading sessions; Sydney, Tokyo, London, NY. hours of overlap where 2 sessions open @ once = busiest T+2

Answer 32

Trading done in pairs - common USD/JPY EUR/USD USD/CHF GBP/USD 1st = base currency 2nd = counter currency 1:x quote EUR/USD (base currency not mentioned) 1.1640/60 Buying euros - higher price

Answer 33

diff in nominal IR rates between 2 countries will determine movement of exchange rates (1+r)=(1+i)(1+R)

Answer 34

Fiscal = use of government spending and taxation to influence the economy set by Gov Monetary = Decisions around IR and money supply Set by central bank ER policy = manner country manages its currency in respect to foreign currencies and the foreign exchange market

Answer 35

Need for active fiscal policy as means to stimulate demand in period of weak private sector demand and investment to avoid deflationary spiral not concerned with PSNCR Monetarists believe deficit would lead to inflation and higher IR post recovery

Answer 36

* Budget surplus – government revenue > government expenditure. * Budget deficit – government revenue < government expenditure. * Balanced budget – government revenue = government expenditure.

Answer 37

Expansionary - financing spending with borrowing -spending increase can lead to increase in real GDP Could result in inflation if economy @capacity Contractionary - collecting more in taxes w/out increasing spending -may raise tax deliberately to take inflationary pressures out of economy Neutral - Collecting more in taxes to increase spending = diversion of income from one part of economy to another

Answer 38

Public sector net cash requirement - annual excess spending over income for entire public sector = cash needed to finance gov activity - Combined financial deficit of central government + local government + public corporations Chancellor sets PSNCR each year, then DMO responsible to issue gilts to achieve borrowing required

Answer 39

charges levied on income/wealth - said to be progressive Income tax = paid by indivs from their earnings -varies widely between country - UK personal allowance = 12570 (reduced by 1 for every 2 earned over 100k) NI - tax on earnings and self employed profits, enable indivs to build up benefits e.g. state pension CGT = applies to chargeable gains on asset sales (annual exemption of 6k, then 10/20% for basic or higher rate - 18/28 for property) IHT = charged on certain transfers of property (not just death). 325k nil rate band then 40% (36% if >10% estate is left to charity) residence NRB = 175k Council tax = local taxation system based on value of property not income of indiv thus can be regressive Corp tax = 25% on profits over 250k. 20% for unit trusts and OEICs

Answer 40

charges levied on consumption or expenditure VAT (value added tax) - % of expenditure, 20% in the UK, aka goods and serv tax Financial transaction taxes - imposed on sale/purchase/transfer if financial transactions -stamp duty in UK, 0.5% of share purchases

Answer 41

takes time for policies to affect economy once implemented fiscal policy lags longer than monetary policy - also takes long time for proposed tax change to become law

Answer 42

Set by: MPC of the BofE Objective: support gov econ objectives Inflation target: 2% +/- 1 Tools: base rate and QE

Answer 43

Set by: ECB - sets rate on main refinancing, deposit facility and marginal lending facility Objective: maintain price stability by keeping HCIP close to but below 2% Inflation target: 2% over medium term (ceiling but no floor) Tools: negative rates, LT bank loans, asset purchase programmes

Answer 44

set by: Fed Objective: promote max employment, stable prices and moderate LT rates Inflation target: average 2% target Tools: OMO, reserve requirements, discount rates, interest on reserves

Answer 45

set by: PBOC Objective: maintain currency stability (domestic prices and exchange rate) + promote economic growth Inflation target: 3% Tools: OMO, reserve requirement ratio, loans to vanks

Answer 46

set by: MPC of RBI Objective: maintain price stability Inflation target: 4% +/- 2% tolerance band set by Indian gov Tools: repo rate, OMO, cash reserve ratio, statutory liquidity ratio

Answer 47

Set by: MPC of SARB Objective: protect value of rand and maintain price stability Inflation target: 3-6% Tools: repo rate

Answer 48

Restrictions on commercial banks in the provision of credit to customers - influence demand for bank credit by making borrowing less desirable (expensive, stringent) general controls = regulate total lending power of system selective controls = regulate credit taken for specific purposes

Answer 49

Actions taken by a government, central bank or regulatory body to limit the flow of foreign capital into/out of an economy Keynesian economic ideas were effective in US and UK for long - maybe because times of low international trade @ implementation discourage flow of capital by imposing costly rules (taxes/tariffs) why? -help economic growth -protect economy -limit currency movement

Answer 50

Method of increasing money supply first adopted by BoJ (then widely post GFC) - when cutting rates isnt working (may be too low to cut further) CB creates money by increasing reserves held by commercial banks at the central bank uses money to buy secs (debt/MBS/equity) from financial instits size of banks balance sheet shrinks and CB balance sheet expands less pressure on commercial bank balance sheet - should increase borrowing which will increase liquidity has resulted in an increase in asset prices in practicality - not increases spending

Answer 51

Quantitative tightening CB selling balance sheet assets thus reducing money supply in the economy contractionary = decreases amount of liquidity