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CFA L1 Matheus > 1. Economics > Flashcards

1. Economics Flashcards

1
Q

Discretionary fiscal policy lags

A

Recognition Lag: policymakers take time to recognize the problem

Action Lag: discussions, vote, political process

Impact Lag: time between measure implementation and its results

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2
Q

Crowd out effect (fiscal policy)

A

Expansionary Government spending may crowd out private investments

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3
Q

Fiscal Multiplier, Balance Budget Mutiplier

A

Fiscal Multiplier: 1 / 1 - [MPC* (1-t)]

BBM: Tax Increase * MPC * Fiscal Multiplier

Net Effect in DA: Fiscal Multiplier - BBM

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4
Q

Price Elasticity of Demand

A
  1. %ΔQ / %ΔP
  2. (ΔQ / ΔP) * (Po / Qo), where

ΔQ/ΔP = linear coef

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5
Q

Normal / Inferior Goods

A

Normal goods: ↑ Income = ↑ Consumption

Inferior goods: ↑ Income = ↓ Consumption

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6
Q

Complement Goods (A and B)

A

↑ Price (A) = ↑ Price (B)

↑ Price (A) = ↓ Consumption (B)

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7
Q

Own-price elasticity signal

A

Positive if demand is upward-sloping (↑ Price = ↑ Consumption)
Negative if demand is downward-sloping (↑ Price = ↓ Consumption)

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8
Q

Giffen Good

A

Rice in China (↓ Price = ↓ Consumption), given that a drop in price wil give room for consumer to spend in other goods

Income Effect (-) > Substitution Effect (+)

Upward sloping demand

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9
Q

Veblen Good

A

Gucci bag (↑ Price = ↑ Consumption), only for some individuals at some prices

If Price ↑, Income Effect and Substitution still reduces overall consumption

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10
Q

Cross-Price Elasticity

A
  1. Find Q = ax + b
  2. Ensure that x is the cross-price you want to check
  3. Apply the formula of elasticity
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11
Q

Substitution effect

A

Always positive (↓ Price = ↑ Consumption)

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12
Q

Income effect

A

Positive if a normal good

Negative if an inferior good

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13
Q

Law of Diminishing Marginal Returns

A

Additional output reduces as input workers increase up to a point

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14
Q

Operate / Shutdown / Breakeven in Perfect Market Competition

A

AVC < P < ATC = Operate

P < AVC < ATC = Shutdown in SR

P = MC = ATC = Breakeven

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15
Q

Monetarist Formula

A

mv = py

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16
Q

GDP deflator

A

Real GDP = Nominal / Deflator

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17
Q

Fundamental Relationship (Savings, Investment, Fiscal Balance, Trade Balance)

A

(G - T) = (S-I) - (X-M)

Gata si Xama

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18
Q

Production Function

A
  1. Y = A * f ( L, K)
  2. (Y/L) = A * f (K/L)

where
A = total factor productivity

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19
Q

Potential GDP

A

GDP* = Hours Worked * Labor Productivity

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20
Q

GDP Growth

A

GDP Growth = Growth Labor Force + Growth Productivity

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21
Q

Neoclassical school

A

Productivity gains may push LRAS (paredão)

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22
Q

Keynesian school

A

Demand shifts = f (Expectations business cycle)
Wages are downward sticky
Government should spend or low interest rates

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23
Q

New Keynesian school

A

Wages and other input prices are also downward sticky (hard to lower)

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24
Q

Laysperes Index

A

Constant goods basket

25
Q

Hedonic adjustment

A

Adjust index for increases in quality

26
Q

Fisher Index

A

Geometric mean between Laysperes and Paasche

27
Q

Paasche Index

A

Adjust index for consumption weights within the basket

28
Q

Creation of Money Formula

A

Money Created = New Deposit / Reserve Requirement

If New Deposits = 100 and Reserve Req. = 0.25

Money Created = 100 / 0.25 = 400

29
Q

Money Multiplier

A

Money Multiplier = 1 / Reserve Req.

If New Deposits = 100 and Reserve Req. = 0.25

Money Multiplier = 1 / 0.25 = 4

30
Q

Monetary Transmission Mechanisms

A
  • Bank’s short term ratings
  • Prices (bonds, equity)
  • Consumer expectations
  • Domestic currency
31
Q

Neutral Interest Rate (formula and definition)

A

Neutral Interest Rate = GDP Growth + Inflation Target

Neutral Rate is the interest rate that keeps inflation @ target.

Rate > Neutral means contraction
Rate < Neutral means expansion

32
Q

Fiscal Multiplier (formula and definition)

A

Fiscal Multiplier = 1 / [1 - MPC*(1-t)]

It means that if G = +100 and Fiscal Multiplier = 2.5, the increase in AD = +250

↑ MPC = ↑ Fiscal Multiplier
↑ T = ↓ Fiscal Multiplier

33
Q

Balance Budget Multiplier (formula and definition)

A

BBM = 100MPCFiscal Multiplier

  • In order to balance the budget to spend more, Govt raises taxes.
  • BBM is used to calculate net effect of G and T in Aggregate Demand

↑ T = ↓ Demand

34
Q

Fisher Effect

A

Nominal Interest Rate = Real Rate + Expected Inflation Rate

35
Q

GDP v. GNP

A

GNP is the production by a country’s citizens

GDP is the production within the country’s borders

36
Q

Comparative Advantage

A

It measures the lower opportunity costs

37
Q

Ricardian Model (Trade) v. Heckscher Ohlin

A

Ricardo: One factor of production: labor
Heckscher Ohlin: redistribution of wealth is problematic. Owners of capital will gain more; Owners of labor will gain less.

38
Q

Trade: Tariffs

A
  • Act over Imports (M)
  • Domestic producers gain
  • Foreign producers lose
  • Govt gains Taxes
39
Q

Trade: Quotas

A
  • Act over Imports (M)
  • Domestic producers gain
  • Consumers lose from an increase in Prices
  • If govt collects full value of the license sold, it works as a tariff
40
Q
  1. Free Trade Areas
  2. Customs Union
  3. Common Market
  4. Economic Union
A
  1. Free Trade Area: No taxes for all
  2. Customs Union: lower taxes for all
  3. Common Market: remove barriers to X / M
  4. Economic Union: unify labor, capital goods, export of goods and services and adopt set of trade restrictions with members outside the group
41
Q

Current Account (definition)

A

Flows of Goods/Services

CC = (X - M ) + Transf. Unilaterais

42
Q

Capital Account

A

Capital Transfers and Acquisition of Non-produced and Non-Financial Assets

  • Fixed Assets
  • Debt forgiveness
  • Sale of Patents/Copyrights/Trademarks
43
Q

Financial Account

A
  • Gold
  • FX reserves abroad
  • IMF SDR
  • Foreign-owned assets within the country
  • Think of the Central Bank
44
Q

Objectives of capital flow restrictions

A
  • Reduce volatility of asset prices
  • Maintain fixed rates
  • Keep domestic rates low
  • Protect local industry
45
Q

Base Currency v. Price Currency (concept)

A
  1. 4 USD / EUR
    - USD is the price currency (numerator)
    - EUR is the base currency (denominator)
46
Q

Real Exchange Rate (concept and formula)

A

Real Exchange Rate = Nominal * (CPI base / CPI price)

  • Order: “bp” = basis point / base over price
  • Adjusted for the CPI difference between countries
47
Q

Forward Rate (concept and formula)

A

Forward = Spot BRL / USD * (CPI USD / CPI BRL)

  • Forward rate is the nominal rate * increase in foreign country’s CPI in relation to our prices (local)
  • If Spot is “Price / Base”, then multiply by (CPI base / price)
48
Q

Exchange Rate Depreciation % (concept)

A

You will only speak in terms of the denominator of the currency exchange rate

Ex.: 1.5 USD / EUR -> 1.2 USD / EUR

a. It expresses EUR in terms of dollars
b. EUR depreciated by [(1.5/1.2)-1] %
c. To get USD movement, invert Spot Rate to EUR / USD and calculate new % change

49
Q

Cross Rate (concept)

A

a. MXN / AUD = (MXN / USD) * (USD / AUD)
b. Cancel USD from the pairs and get the 3rd pair

  • It is possible to get a pair from two different pairs
50
Q

Non-arbitrage condition for Forward Exchange Rate (formula and concept)

A

Forward / Spot = (1 + i price currency) / (1 + i base currency)

  • Forward over Spot
  • Order (formula): P / B
  • Order (spot): P / B

The only difference between spot and forward refers to the difference between countrie’s interest rates. Otherwise, carry trade would be possible

51
Q

Forward Rate Exchange (i) v. Non-Arbitrage Condition (ii)

A

(i) Forward Exchange Rate: adjusts for CPI “base / price”

Formula = BRL / USD * ( 1 + CPI USD) / (1+ CPI BRL)
- Used to calculate 90-day fwd

(ii) Non-arbitrage Forward Exchange Rate: adjusts for investment increase in each country (interest rate)

Forward / Spot = (1 + i price) / (1 + i base)
- Used to calculate non-arbitrage price of currency

52
Q

Marshall-Lerner Condition (formula and concept)

A

Wxports * Elasticity(x) + Wimports * (ElasticityM - 1) > 0

  • FX rate affects trade balance based in the basket of consumption (weight) and elasticity-price of demand for X and M
  • If elasticity of X/M is high, it will be affected by FX movements
  • In this case, currency depreciation leads to improvements in trade balance
  • Remember that elasticity is high if Imports are non-essential goods. This makes the case for reducing deficits via depreciation.

To satisfy the Marshall-Lerner condition when M demand elasticity is 0, X demand elasticity must be larger than the ratio of M to X in the trade balance. This is necessary for trade surplus to occur.

53
Q

Inclusion in the GDP:

a. Transfer Payments
b. Owner-occupied housing
c. Government Services

A

a. Not. Medicaire / Medicate are money allocation, not necessarily produced in current year
b. Yes. Service flowing from house to occupant, whether they are owners or not
c. Yes. Service flowing from consumer to government.

54
Q

Total Factor Productivity (concept and formula)

A

Total factor productivity represents output growth in excess of that resulting from the growth in labor and capital.

Y = A * f (K, L)

55
Q

Long-Term Sustainable Growth

A

Total Hours = Labor Force * Avg Output per Worker

Sources are:

  • Increase in labor force
  • Increase in physical capital
  • Increase in technology

You cannot achieve long-term growth by only increasing physical capital / worker due to diminishing returns (40 PCs / 30 workers)

56
Q

Which is the meaning of an increase of real exchange rate in USD/EUR?

A

↑ Real FX Rate = ↑ Purchase power of the base currency (denominator) in price currency (numerator)

By itself, a Real FX Rate does not indicate the directions or degrees of change in either the nominal exchange rate or the inflation difference. The 3% may come from inflation or nominal value (speculation, for example).

57
Q

Conventional Fixed Peg (concept)

A

A conventional fixed peg allows for a small degree of fluctuation around the target exchange rate

58
Q

Currency Board (concept)

A

The monetary authority will exchange its currency for USD at 1:1 ratio. Many businesses in the Islands will accept USD but this is not transaction.

Example: HKMA (Hong Kong)

59
Q

Reducing Trade Deficit (concept)

A

a. Depends on elasticity of X and M
b. Luxury goods have higher inelasticity
c. Other goods are less impacted

To satisfy the Marshall-Lerner condition when M demand elasticity is 0, X demand elasticity must be larger than the ratio of M to X in the trade balance. This is necessary for trade surplus to occur.

CFA L1 Matheus (5 decks)

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