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CFA Level 2 > Economics > Flashcards

Economics Flashcards

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1
Q

Dutch disease

A

currency appreciation driven by strong export demand for resources makes other segments of the economy, in particular manufacturing, globally uncompetitive

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2
Q

Neoclassic model

A

Sustainable growth rate of an economy is a function of population growth, labor share of income, and rate of technological advancement. Growth from savings is temporary

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3
Q

Endogenous model

A
  • no diminishing marginal returns to capital for the economy as a whole
  • increasing the saving rate permanently increases the rate of economic growth
    -production function = y(e) = f(k(e)) = c*k(e), where y(e) is output per worker, k(e) = capital per worker, c is constant
  • growth rate of output per capita = delta y(e) = delta k(e) = s*c-o-n, where s is savings rate, c is constant, o is depreciation, n = labor force growth
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4
Q

capital-labor ratio

A

an increase in the capital-labor ratio, moving along the production function to the right

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5
Q

capital deepening

A

adding more and more capital to a fixed number of workers increase per capita output, but at a decreasing rate

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6
Q

effect of capital deepening on country with high capital-labor ratio and low marginal product of capital

A

little impact because of diminishing returns

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7
Q

effect of population growth on gdp growth and per capita gdp growth

A

increases gdp growth, but no effect on per capita gdp growth

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8
Q

a country with high capital-labor ratio and low marginal product of capital will increase growth in gdp per capita through what?

A

technological progress

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9
Q

indicators of dutch disease

A

high export demand for natural resources and high currency appreciation

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10
Q

The key international parity conditions

A

1) Covered interest rate parity
2) Uncovered interest rate parity
3) Forward rate parity
4 Purchasing power parity
5) International fisher effect

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11
Q

Covered interest rate parity

A

Investment in a foreign money market instrument that is completely hedge against exchange rate risk should yield exactly the same return as an otherwise identical domestic money market instrument

If the forward and spot exchange rates, as well as one of the risk-free rates are known, the other risk-free rate can be calculated

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12
Q

Uncovered interest rate parity

A

The proposition that the expected return on an uncovered (unhedged) foreign currency (risk-free) investment should equal the return on a comparable domestic currency investment

Given the spot exchange rate and the expected future change, the future spot exchange rate can be calculated

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13
Q

Forward Rate Parity

A

Forward exchange rate will be an unbiased predictor of the future spot exchange rate

Not a perfect forecast, just an unbiased one

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14
Q

Why uncovered interest rate parity prediction will not hold

A

there is no arbitrage condition that forces uncovered interest rate parity to hold

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15
Q

Using forward points to forecast exchange spot rate assumes what about investors

A

they are risk neutral

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16
Q

Purchasing power parity (PPP)

A

Exchange rates move to equalize the purchasing power of different currencies

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17
Q

Absolute version of PPP

A

prices of goods and services will not differ internationally once exchange rates are considered

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18
Q

Relative version of PPP

A

changes in nominal exchange rates over time are equal to national inflation rate differentials

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19
Q

Real interest rate parity

A

Real interest rates will converge to the same level across different markets

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20
Q

International fisher effect

A

nominal interest rate differentials across currencies are determined by expected inflation differentials

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21
Q

Forward rates are unbiased predictors of future spot rates if which two parity conditions hold

A

Covered interest rate parity and uncovered interest rate parity

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22
Q

International fisher effect requires which parities to hold

A

ex ante PPP and real interest rate PPP

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23
Q

FX carry trade

A

Investment strategy that involves taking long positions in high-yield currencies and short positions in low-yield currencies

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24
Q

Carry trades will be profitable when which parity does not hold

A

uncovered interest rate parity, in the short or medium term

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25
Q

Three accounts that make up country’s balance of payments

A

Current, capital and financial account

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26
Q

Impact of exports>imports on current account and capital account

A

Negative current account and current account deficit, must make it up with a surplus in capital account

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27
Q

Impact of long-term current account deficit on currency

A

Currency will depreciate because that country is financing their acquisitions of imports through the continued use of debt

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28
Q

Why do investment/financing decisions usually dominant exchange rate movements

A

1) Prices tend to adjust slowly than exchange rates
2) Product of real goods and services takes time, while liquid financial markets allow virtually instant redirection of financial flows
3) Current spending/production reflects purchases and sales of current production while investment/financing decisions reflect reallocation of existing portfolios
4) Expected exchange rate movements can induce very large short-term capital flows.

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29
Q

Impact on domestic currency | Expansionary monetary policy + expansionary fiscal policy with low capital mobility

A

domestic currency depreciates

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30
Q

Impact on domestic currency | restrictive monetary policy + expansionary fiscal policy with low capital mobility

A

indeterminate

30
Q

Impact on domestic currency | Expansionary monetary policy + restrictive fiscal policy with low capital mobility

A

indeterminate

31
Q

Impact on domestic currency | restrictive monetary policy + restrictive fiscal policy with low capital mobility

A

appreciates

32
Q

Potential GDP

A

the maximum amount of output an economy can sustainably produce without inducing an increase in the inflation rate

output level that corresponds to full employment with consistent wage and price expectations

33
Q

Grinold-Kroner Model

A

E(r) = dividend yield + expected repricing + inflation rate + real economic growth - change in shares outstanding

34
Q

Classical growth theory - economics

A

in the long run, the adoption of new technology results in a larger but not richer population, thus the standard of living is constant over time and there is no growth in per capita output

35
Q

Increase in the savings rate under neoclassical model

A

implies higher capital-to-labor ratio (k) and higher output per worker (y) because a higher saving rate generates more saving/investment at every level of output

36
Q

Increase in labor force growth (n) under neoclassical model

A

reduces equilibrium capital-to-labor

37
Q

increase in Deprecation rate (o) under neoclassical model

A

reduces equilibrium capital-to-labor

38
Q

Why are emerging market countries better able to influence their exchange rates

A

Their reserve levels as a ratio of average daily FX turnover are generally much greater than those of DM countries

39
Q

What happens to foreign exchange reserves during currency crises

A

they decline

40
Q

What happens to broad money growth during currency crises

A

they increase

41
Q

Behavior of trade balance right before a currency crises

A

no change

42
Q

Impact on domestic currency | expansionary fiscal policy | restrictive monetary policy with high capital mobility

A

currency appreciation

43
Q

impact on domestic currency | expansionary monetary policy | restrictive fiscal policy with high capital mobility

A

currency depreciation

44
Q

impact on domestic currency | expansionary monetary policy | expansionary fiscal policy with high capital mobility

A

ambiguous

45
Q

impact on domestic currency | restrictive monetary policy | restrictive fiscal policy with high capital mobility

A

ambiguous

46
Q

Relative to a normal distribution, the distribution of carry trade returns are more

A

peaked with negative skew

47
Q

Are forward rates good predictors of forward spot rates

A

no

48
Q

Under what time frame do international parity conditions hold

A

medium-to-long-term

49
Q

Under what time frame do international parity conditions not hold

A

short-medium term

50
Q

Formula under UIRP

A

inflation(foreign) - inflation(domestic)

51
Q

which key determinant of exchange rates is absent in the Mundell-Fleming model

A

inflation rates

52
Q

What two conditions must hold for real interest rate parity to hold

A

UIRP and ex ante PPP

53
Q

Under UIRP, country with higher rates, what happens to their currency

A

depreciates

54
Q

Formula for pure capital deepening

A

Growth in labor productivity - growth in TFP

the larger the difference, the more important capital deepening is as a source of growth

55
Q

Most important factor in long-term stock market growth

A

Growth in GDP

56
Q

Club convergence

A

The idea that only rich and middle income countries sharing a favorable set of characteristics (part of the club) will converge to the income level of the richest countries

The club includes institutional structures, property rights, political stability, etc.

57
Q

Absolute convergence

A

The idea that all countries will eventually converge to the same gdp per capita output

58
Q

Conditional convergence

A

The idea that countries will only catch the richest countries if they have the same savings rate, population growth rate, and production function

59
Q

Douglas-Cobb Function

A

Y(L,K) = AL^y * K^x

Y - total production
A - total factor productivity
L - labor
K - capital

The premise is constant returns to scale, and does display diminishing returns to scale

60
Q

Regulatory Competition

A

When regulators compete to provide a more conducive environment for businesses

61
Q

Regulatory Capture

A

Regulation arises to enhance the interests of the regulated

62
Q

Independent Regulators

A

Regulators recognized and granted authority by the government. They are not part of the government and do not rely on government funding

63
Q

Self-regulating Bodies

A

Private, non-government bodies that both regulate and represent their members. Some SROs are also independent regulators

64
Q

Self-regulating organization

A

Self-regulating body given authority by the government

65
Q

Coase Theorem

A

If an externality can be traded and there are no transaction costs, then the allocation of property rights will be efficient

66
Q

Substantive Law vs. Procedural Law

A

Substantive focuses on the rights and responsibilities of entities and relationships of entities, while procedural focuses on the protection and enforcement of substantive laws

67
Q

GDP Growth Rate

A

1) Long-term growth rate of technology + (x * long-term growth rate in capital) + (1-x) * (long-term growth rate in capital)

2) Long-term growth rate of labor force + long-term growth rate in labor productivity

68
Q

Sustainable growth of output per capita under neoclassical model

A

Growth rate in technology / labor’s share of GDP (1-a)

69
Q

Sustainable growth rate of output under neoclassical model

A

sustainable growth rate of output per capita + growth of labor

70
Q

Adverse Selection

A

When sellers have information that buyers do not

71
Q

The correlation between the ownership of natural resources and subsequent real GDP growth

A

insignificant, but not different from 0

72
Q

Growth due to TFP

A

growth from labor productivity - capital deepening

CFA Level 2 (11 decks)

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