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CFA 2 > Economics > Flashcards

Economics Flashcards

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1
Q

Growth of output equation =

Given technology, capital and labour and elesticity of output

A

Growth of output = growth of technology + α(growth of capital) + (1- α)(growth of labor)

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2
Q

BWP/BMD bid offer

BWP/AUD = 7.88557 - 7.88582
BMD/ AUD = 0.759224 - 0.759264

A

First step align the equation BWP to and BMD bottom. BMD/ AUD = 1/0.759224 - 1/0.759264 - AUD/BMD = 1.317065 - 1.31713

BWP/AUD bid x AUD/BMD bid = BWP/AUD bid
7.88557 x 1.317065 = 10.3858

BWP/AUD offer x AUD/BMD offer = BWP/AUD offer
7.88582 x 1.31713 = 10.3867

Note bid always lower values and offer always higher value.

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3
Q

Annualised Forward premium =

A

Annualised Forward premium = [Forward rate - spot rate / spot rate] x 360/180

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4
Q

Covered Interest rate parity

Vs

Uncovered Interest rate parity

A

Covered Interest rate arbitrage is bound by arbitrage so you cannot make money from trading them. Differing interest rates will offset eachother. Two rates can only predict forward rates

Vs

Uncovered Interest rate arbitrage is not bound by arbitrage so interest rate differentials need not effect returns. Unhedged positions could return the same. Spot rates can be predicted with two risk free rates.

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5
Q

International Fisher relationship =

A

International Fisher relationship = Ratea - Rateb = Inflationa - Inflationb =

Interest rate differential of a country = Inflation differential of a country

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6
Q

What rate does a fully hedged Argentine investor receive?
Argentina rates 3.4%
US rates 2.8%

A

Fully hedged investors receive domestic currency. He will receive Argentinian rate of 3.4%

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7
Q

3 month USD/AUD rate =

USD 6%
AUD 5%

A

3 month USD/AUD rate =

1 + (USD x 3/12) / 1+ (AUD x 3/12)

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8
Q

Carry trade =

Skew (relating to carry trades)

A

Carry trades make money buy buying the higher yielding asset. But this only works if uncovered interest rate parity holds which is not bound by arbitrage.

FX carry trades have fat tails and negative skew.

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9
Q

Current account =

Capital account =

Current account deficit affect on debt =

A

Current account = Measures exchange of goods and services. Weather you are selling more than you are importing

Capital account = Measures flow of funds for debt and equity. A current account deficit must experience a capital account surplus in the capital account or depreciate its currency.

Current account deficit affect on debt = Increase in debt levels as a percentage of GDP due to weaker currency making foreign debt more expensive.

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10
Q

Portfolio balance channel =

Flow supply channel =

A

Portfolio balance channel = investor countries with current account surpluses usually have capital account deficits due to investments in countries with current account deficits. Rebalance dates of investor countries can have a significant negative impact on investee currencies.

Flow supply channel = Current account deficits increase supply of that ccy in the market as exporters to that country exchange that currency on sale of goods. This depreciates the currency and can restore the current account deficit to a balance.

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11
Q

Capital mobility ie changing interest rates (monetary) or changing tax rates (fiscal) all effect currency. Developing markets capital flows are sometimes restricted creating low capital mobility.

High capital mobility (restrictive of expansionary fiscal and monetary policy)
Currency Falls
Currency gains

Low capital mobility
Currency falls
Currency gains

A

High capital mobility (restrictive or expansionary fiscal and monetary policy)
Currency Falls with restrictive fiscal, expansionary monetary
Currency gains with expansionary fiscal, restrictive monetary

Low capital mobility
Currency falls with expansionary fiscal, expansionary monetary
Currency gains with restrictive fiscal, restrictive monetary

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12
Q

Debt sustainability channel =

Govt approach to big inflows of foreign investment =

A

Debt sustainability channel = Increased ratio of net external assets to GDP will increase long term value of a ccy

Govt approach to big inflows of foreign investment = impose capital controls and sale of currency in FX markets.

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13
Q

Pure monetary Model =

Dornbusch overshooting model =

Portfolio balance approach =

A

Pure monetary Model = PPP holds out at any point in time and output is held constant. Ie a 4% increase in money supply creates 4% inflation.

Dornbusch overshooting model = Prices are sticky in the short term and do not immediately reflect changes in monetary policy.

Portfolio balance approach = Focusses on fiscal policy only. Expansionary fiscal policy creates a falling currency, bonds are held if interest rates are higher and currency appreciates. Large budget deficits lead to currency depreciation.

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14
Q

Absolute PPP

vs

Relative PPP

A

Absolute PPP = Exchange rates are driven by national price levels. Inflation rates in two countries are in equilibrium over time. This does not hold with import tariffs in place.

vs

Relative PPP = Exchange rates are driven by actual inflation levels. Compares the price of a basket of goods utilising the law of one price.

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15
Q

Higher interest rate due to high inflation effect on currency?

A

Higher interest rate due to higher inflation = weaker currency.

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16
Q

PPP

Ex ante PPP

A

PPP is a poor predictor of short term exchange rates however rates tend to move towards PPP in the long run

Ex ante PPP is the same as relative PPP however instead of actual inflation it uses EXPECTED inflation

17
Q

Domestic pull factor

Domestic push factor

A

Domestic pull factor is attracting cash to your economy from domestic policies such as industrial developments

Domestic push factor is attracting cash solely on monetary policy reasons such as higher interest rates.

18
Q

Emerging market ability to control FX volatility =

Developed markets FX reserves

A

Emerging markets are bettr at currency intervention than developed markets.

Developed markets FX reserves are actually negligible as a proportion of daily FX activity.

19
Q

Capital controls

Fixed currencies

A

Capital controls are actually a positive policy which can prevent a currency crisis.

Fixed currencies are a bad policy which can often result in a currency crisis.

20
Q

M2 money supply around a currency crisis.

Long run average level of currency ahead of a currency crisis?

Liberal markets in a currency crisis

A

M2 money supply grows quickly ahead of a ccy crisis before falling sharply immediately after as money leaves the economy.

Currencies trade higher than long run average level ahead of a currency crisis

Liberal markets often lead to a currency crisis due to ease of money leaving an economy.

21
Q

How do you achieve growth in low savings per capita economies?

Actual GDP below potential GDP, bond prices move up or down?

Change in potential GDP growth =

A

You achieve growth in low savings per capita economies by attracting foreign investment.

Actual GDP below potential GDP, bond prices move up due to expected rate cuts by central banks. Therefore buying more fixed interest is desirable.

Change in potential GDP growth means extra unit of future consumption is less valuable.

22
Q

Aggregate price of equities given GDP, aggregate earnings and P/E?

%change in stock market =

Growth in equity prices =

A

Aggregate price of equities = GDP x [Aggregate earnings/GDP] x P/E

%change in stock market = %c Nomical GDP growth + %c E/GDP + %c P/E

Growth in equity prices = % change in GDP + Constant

23
Q

Two Factor aggregate demand

Y Output =

Note: Y Output could be growth in output of GDP

Capital Deepening =

A

Y Output = TFP x K(share of allocated capital x L (1-SAC)

Total Factor Productivity = tech
K = Capital
L = Labour

Y = TFP x F (balance between capital or labour) x capital x labour

Capital Deepening = Growth in Labour - Growth in TFP

24
Q

Cobb Douglas Function =

Dutch disease =

Natural resources access or ownership? =

A

Cobb Douglas Function = Constant returns to scale and diminishing marginal productivity

Dutch disease = High levels of investment to a countries natural resources may strenthen a currency to the detriment of all other sectors

Access to a countries natural resources is more improtant the actually owning the natural resources

25
Q

Marginal price of capital aka Rental price of capital =

Output per worker =

Capital Deepening =

A

Marginal price of capital aka Rental price of capital = constant x (Y/K)

Output per worker = T (K/L)

Capital Deepening = K/L

As capital deepening increases then the ratio increases.

26
Q

Human Capital =

A

Human capital is accumulated knowledge and skill acquired by workers.

27
Q

Classic growth theory =

A

Populations may growth but standard of living is constant.

  1. Population wealth grows above subsistence level due to capital or technology.
  2. Population growth explodes.
  3. Marginal return to labour reduces productivity.
  4. Populations fall back toward subsistence elvels.
28
Q

Neoclassical growth Theory =

Higher savings rates

A

Estimates an economies ‘STEADY STATE GROWTH RATE’. Growth in labour and TFP must be steady.
Output per capita is the key measure. and must be constant under Neoclassical.
Marginal returns to capital will be decreasing.

Higher savings rate = higher per capital output, higher labour productivity. long term growth rate will diminish.

29
Q

Endogenous Growth =

A

Endogenous Growth is where technological growth emerges as the result of investment in both physical and human capital. There is no steady state growth rate (unlike neoclassical).
Increased investment can PERMANENTLY increase growth rate at a constant level.
Higher savings rate CAN permanently increase economic growth.

Countries can stay ahead of others as there is no diminishing returns from investment.

30
Q

Endogenous vs Neoclassical

A

Endogenous supports self-sustaining growth, Neoclassical suggests diminishing growth.

31
Q

Club convergence

Absolute convergence

Neoclassical conditional convergence

A

Club convergence in order for poorer countries to converge with wealthier countries they must put institutional changes in place.

Absolute convergence where developing countries catch up if technology is freely shares all countries can have the same output per capita.

Neoclassical conditional convergence where convergence is dependent on having the same population growth, savings and production function.

32
Q

Externalities

Anti competitive behaviour

Moral Hazard

A

Externalities are the external factors which adversely effect third parties such as pollution, systemic risk, financial contagion and the supply of good.

Anti competitive behaviour such as predatory pricing, exclusivity agreements, price discrimination, price collusion, M&A causing a monopoly.

Moral Hazard where a fund manager fee structure may encourage him/her to take excessive risk.

33
Q

What is IOSCO and the Laws =

Comparative advantage=

Adverse selection=

A

IOSCO is a standeard setter (not regulator) - Members include SEC and FCA. IOSCO Laws includes, company law, commercial/contract law, taxation law, bankrupcy/insolvency law, competition law, banking law and dispute resolution.

Comparative advantage is where countries allocate resources to locations where production of goods are more resourceful.

Adverse selection is information Asymmetry and informational friction where parties such as directors have more information than others.

34
Q

Regulatory arbitrage =

A

Regulatory arbitrage is moving a head office to locations with less stringent regulation or taking advantage of a law in one jurisdiction vs another.

35
Q

Which is a Self Regulating Organisation (SRO) of the below? Difference between SRO and Self regulating body?

Public Company Accounting Oversight Board PCAOB?

Securities Exchange Commission SEC?

FINRA

A

SROs receive funding from the government SRBodies do not.

PCAOB is and independant regulator (not SRO)

SEC is a government agency and SRO

FINRA is an SRO

36
Q

Regulatory capture?

Net Regulatory Burden?

A

Regulators aspiring to work for the very firm they regulate. Regulators also having less expertise and info than the institution they are trying to regulate.

Net Regulatory Burden = Private cost of regulation to a COMPANY - Private Benefit of regulation to a COMPANY

37
Q

Higher business risk =

Regulatory sandbox =

Cost benefit analysis =

Assessing regulatory benefit =

A

Higher business risk = Potential increase in the level of fines imposed for regulatory breaches

Regulatory sandbox = Trialling regulatory change to collect data for cost benefit analysis.

Cost benefit analysis = If positive then new regulation will likely be implemented

Assessing regulatory benefit can only really effectively be done once regulation has been put in place

38
Q

Warning signs of a pending currency crisis =

A
  • Stable trade balance
  • Increasing inflation
  • Ratio of real exchange rate to mean real exchange rate increasing
  • Broad money growth rate increasing in both nominal and real terms

CFA 2 (10 decks)

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