CFA L2 Econ Flashcards

Question

Forward premium/discount calculation

Answer 1

F - S0 OR [ (1 + Ra(days ÷ 360)) ÷ (1 + Rb(days ÷ 360)) ] * S0 OR S0 * [ (days ÷ 360) ÷ (1 + Rb(days ÷ 360)) ] * (Ra - Rb)

Answer 2

1. [ (1+.08(360 ÷ 360)) ÷ (1+ .06(360 ÷ 360)) ] = $1.3245 → $1.3245 < $1.35, so Euro (BASE) is overvalued in the forward market. The 1-year forward rate should be $1.3245. 2. Sell the Euro in the forward market and buy Euro in the spot market. If the Euro was undervalued (#1 < $1.35), we would buy it in the forward market and sell it in the spot market. 3. Borrow $1,000 at 8% interest (repay $1,080 in one year). Convert the $1,000 into Euros for €769.23. Then, invest in euros (€815.38 or $1,100.76 in one year). Profit of $1,100.76 - $1,080= $20.76

Answer 3

In a case where forward currency contracts are not available arbitrage is available, we refer to the unconvered interest rate parity theory. W/ this theory, if one currency trades higher to another currency, the higher currency will be expected to depreciate over time so that the spot rate and the expected future spot rates (NOT the forward rate) are in equilibrium. Calculation= Ra - Rb OR relative PPP + international fisher effect Ex: Country A interest rates = 9%, country B interest rates = 4%. The uncovered interest rate parity says that an investor should be indifferent between investing in the currencies because county A is expected to decrease at 5% annually relative to country B. ## Footnote * Assumes the investor is risk neutral. * Often DOES NOT hold in the short-run but DOES hold in the long-run. * Uncovered interest rate parities DOES NOT assume arbitrage-free.

Answer 4

When the forward rate = expected future spot rate. When this happens we say the forward rate is an unbiased predictor of the future spot rate. ***With forward rate parity, uncovered and covered interest rate parity are both true.*** Form: F = E(S1)

Answer 5

Real interest rates are assumed to converge across different markets. The idea is based on the idea that with countries with free capital flows, funds will move to the country with a higher real rate until real rates are equal.

Answer 6

Says that the difference between two countries' nominal interest rates should be equal to the difference between their expected inflation rates. Form: RnomA - RnomB = E(inflationA) - E(inflationB) ## Footnote * Assumes real interest rate parity. * Assumes all countries are perceived to be equally risky by investors. This is untrue since investors demand a higher real rate of return on emerging market currencies.

Answer 7

States that identical goods should be the same price in all locations after adjusting for the exchange rate. Does not hold due to the effects of tariffs, transportation costs, etc.

Answer 8

Since the law of one price often does not hold due to tariffs, transaction costs, etc., absolute PPP compares the avg. price of a basket of consumption goods between countries using an index such as CPI. Absolute PPP requires only that the law of one price be correct on average. ## Footnote * Absolute PPP does not hold because the weights of the various goods might not be the same in two economies. * Absolute purchasing power parity is not used to predict exchange rates.

Answer 9

An economic theory that states that exchange rates will change to reflect differences in inflation between countries. Ex: If country A has a 6% inflation rate and country B has a 4% inflation rate, then country A's currency should depreciate by 2% relative to country B's currency. Equation: % change in S = Inflation(A) - Inflation(B)S = spot price. ## Footnote * This is similar to unconvered int. rate parity, however instead of int. rates, this deals w/ exchange rates. * Since there is no true arbitrage available to force relative PPP to hold, relative PPP is commonly violated in the short-run and medium-run. * Evidence suggests that relative PPP is useful for estimating the relationship between exchange rates and inflation in the long-run.

Answer 10

Same as relative PPP but uses expected inflation instead of actual inflation. Equation: E % change in S = Inflation(A) - Inflation(B) * E= expected

Answer 11

* Ex-ante PPP: seldom works over short and medium terms. Holds well over long-term. * Uncovered interest rate parity: seldom works over short and medium terms. * Forward rates.

Answer 12

False, since forward rate parity only holds if there covered and uncovered interest rate parties hold, and since uncovered interest rate parity is often violated, forward exchange rates are often poor predictors.

Answer 13

Expected change in spot rates = Nominal yield spread + Difference in expected national exchange rates + forward premium/discount ## Footnote * In this model, there are no excess returns * Since there is high volatility in exchange rates in the short-term, it's hard to predict future spot rates accurately.

Answer 14

False, combining all parities indicates that expected returns on risk-free securities should be the same in all countries and exchange rate risk is really just inflation risk.

Answer 15

1. The real, risk-free return will be the same in all countries. 2. Investing in countries with high nominal interest rates will not generate excess returns because the high nominal interest rates will be accompanied by local currency depreciation. 3. Exchange rate risk is simply inflation risk, so investors interested in real returns will not face exchange rate risk. 4. All investors will earn the same expected return in their own currency on any investment denominated in a foreign currency.

Answer 16

* If forward rate parity holds, uncovered int. rate parity also holds and vice versa. * If ex-ante relative PPP and the IFR both holds, uncovered int. rate parity will also hold. * Forward rates are unbiased predictors of future spot rates if covered and uncovered int. rate parities hold.

Answer 17

An investor invests in a higher yielding currency using funds borrowed in the lower yielding currency (a.k.a the funding currency). The carry trade is premised on uncovered interest rate parity not holding. Return calculation= interest earned on investment - funding cost - currency depreciation ## Footnote * This is not an arbitrage trade. This is a leveraged trade. This is betting against interest rate parity. * Carry trades typically perform well during low volatility periods. * Carry trades have a non-normal distribution. * These distributions are negatively skewed with positive excess kurtosis (fatter tails).

Answer 18

* If the funding currency appreciates significantly against the currency of the investment. * Crash risk

Answer 19

Probability of a large loss on a carry trade. Stems from other investors having the same idea of a carry trade, thus the demand for the investment currency goes up and therefore the value goes up. However, this creates the risk that all these investors will try to sell at the same time leading to a steep decline in the investment currency.

Answer 20

The method by which countries measure all of the international monetary transactions within a certain period. This includes government transactions, consumer transactions, and business transactions. BOP accounts include all payments/liabilities to foreigners and payments/obligations from foreigners. (X - IM) = S + I + (T - G) ## Footnote * Comprised of current account, capital account, and a financial account

Answer 21

Summarizes whether a country is selling more goods/services to the rest of the world (current account surplus) or whether they are buying more of them (current account deficit). * Exchange of goods/services * Exchange of investment income * Unilateral transfers (one-way transfer of assets (ex: money received from those working abroad))

Answer 22

It is unclear. This is because high interest rates tend to decrease consumer spending, which leads to less imports being purchased because people will save more (increase the current account) but higher rates will also increase the exchange rate and therefore make exports more expensive (decrease the current account). The impact to the current account depends on which of these affects is more powerful. The three mechanisms decide which of the effect is most powerful.

Answer 23

* Flow supply/demand mechanism: Looks at imports/exports in the current account. When imports > exports, there is a currency deficit which results in lack of demand for the currency- currency depreciation. This is dependent on the initial deficit, the influence of exchange rates on prices, and price elasticity of demand. * Portfolio balance mechanism: When a country has a current account surplus, it usually has a capital account deficit in the form of investments into other countries with current account deficits. When these investor countries rebalance their portfolios, it can have a negative impact on the value of the currencies of the countries invested in. * Debt sustainability mechanism: When a country runs a current account deficit it may have a capital account surplus by borrowing from abroad. Once the country takes on too much debt, it can lead to a confidence erosion from investors which can lead to rapid depreciation of the borrower's currency.

Answer 24

* The initial deficit: The larger the initial deficit, the larger the depreciation of the domestic currency is needed in order to restore the current account balance. * The influence of the exchange rate on prices of traded goods that are imported/exported: As a country's currency depreciates, the cost of imports increases. * Price elasticity of demand: For inelastic goods, imports consumed will remain stable.

Answer 25

False, eventually a current account deficit will lead to currency depreciation.

Answer 26

Measures the flow of funds for debt and equity investment into and out of the country. Comprised of: * capital transfers (financial assets that migrants bring when they come to a country, debt forgiveness) * sales and purchases of non-financial assets (copyrights, franchises, etc.)

Answer 27

* Higher REAL interest rate countries attract capital flow which leads to currency appreciation. * Excessive capital flows can lead to excessive appreciation and can be problematic.

Answer 28

False, capital accounts have a more immediate effect on exchange rates than current accounts.

Answer 29

False, when a country experiences a current account deficit it must generate a capital account surplus or it will have to see its currency depreciate.

Answer 30

Evaluates the ***short-term*** impact of monetary and fiscal policy on interest rates and thus exchange rates. ## Footnote * Assumes inflation is not a concern. * Assumes changes in demand are not a concern.

Answer 31

Recall, under a fixed exchange rate regime, a currency is fixed relative to another major currency. Expansionary monetary policy (in an economy w/ high capital mobility) leads to depreciation of the domestic currency under a fixed rate regime. The government would have to purchase its own currency in the FX market, which would essentially reverse the expansionary attempt. The opposite is true for restrictive monetary policy. Restrictive fiscal policy will lead to a ST decrease in the value of the local currency.

Answer 32

False, if the government wants to manage monetary policy, it must either use floating exchange rates or restrict capital movements to keep them stable. This is due to the implications of Mundell-Fleming model for fixed exchange rate regimes.

Answer 33

The Mundell-Fleming model assumes that inflation plays no role in exchange rate determination. However, monetary models assume that output is fixed so that monetary policy primarily affects inflation and thus exchange rates. Monetary models only focus on monetary policy, not fiscal policy. The two primary monetary models are: * Pure monetary model * Dornbusch overshooting model

Answer 34

Under this model, the PPP holds at any point in time and output is held constant. ***This model assumes monetary policy affects exchange rates over the long run through its impact on prices and inflation, not through interest rates and GDP (what the Mundell Fleming model says).*** Expansionary monetary policy (increase in MS) leads to an increase in prices and a decrease in the value of the domestic currency over the long-run. Growth in MS affects the trajectory of FX rates but not the current exchange rate. The opposite is true for restrictive monetary policy. ## Footnote * Does not take into account expectations about future monetary policy decisions.

Answer 35

Under this model, PPP does not hold in the short-term. ***This model assumes that prices are sticky in the short-term and are not readily affected by monetary policy in the short-term. However, prices are flexible in the long-run.*** With expansionary monetary policy in this model, prices increase over the long-run. Expansionary policy leads to a decrease in interest rates and a larger-than-PPP-implied (excessive) decrease in domestic currency value due to capital outflows. Exchange rates decrease in the short-term, but in the long-run, exchange rates gradually increase toward their PPP implied values. In this model, currency depreciates in the short-term and long-term. The opposite is true for restrictive monetary policy in this model.

Answer 36

This is a model for only fiscal policy, and takes a longer-term view that the Mundell-Fleming model. If a government pursues sustained expansionary fiscal policy, investors will evaluate risk vs return, which typically the yield will increase due to a high risk premium. If investors feel comfortable with the risk, they will continue to purchase bonds, however continued increases to fiscal deficits are unsustainable and eventually investors may refuse to continue to invest in the domestic currency leading to currency depreciation.

Answer 37

In the short-term, with free capital flows, expansionary FISCAL policy leads to domestic currency appreciation through higher interest rates. In the long run, the government must reverse course which will lead to currency depreciation. If the government doesn't reverse course, it will have to print money to monetize its debt, which will also lead to currency depreciation.

Answer 38

Push and pull factors: Push factors= driven by mobile international capital seeking high returns from a diversified portfolio. Not determined by domestic factors. Pull factors= favorable developments that make a country an attractive destination for foreign capital (ex: price stability, flexible exchange rate regime, etc.)

Answer 39

Capital flows can lead to excessive currency appreciation, which can lead to loss of competitiveness of exports in global markets, asset price bubbles, and excessive consumption fueled by credit creation. Policymakers may intervene in these cases to impose capital controls or by the central bank intervening in the FX market.

Answer 40

* Ensure currency doesn't excessively appreciate. * Allow the pursuit of independent monetary policies without having to worry about excessive appreciation. * Reduce excessive inflow of capital.

Answer 41

Assets (currencies, bonds, treasuries, etc.) held as reserves by a central bank in foreign currencies. These assets serve many purposes but are most significantly held to ensure that a central government agency has backup funds if their national currency rapidly devalues or becomes entirely insolvent.

Answer 42

For developed countries, central banks are pretty ineffective at intervening in FX markets. For emerging markets, the evidence is less clear. ## Footnote * Effectiveness usually depends on the size of central bank foreign currency reserves relative to trading volume of their currency.

Answer 43

* Terms of trade (net exports) deteriorate. * Exchange rates are fixed or partially fixed. * FX reserves decline dramatically: central bank is running out of ammunition to fight currency depreciation. * Currency value rises above its historical mean. * Inflation increases. * Capital markets go from restricted capital to now allowing for free flow of capital. * Money supply relative to bank reserves increases. * Appearance of banking crises.

Answer 44

When the foreign currency is the base currency

Answer 45

When the domestic currency is the base currency.

Answer 46

False, most international parity conditions hold over the long-term but not the short-term.

Answer 47

* Savings and investment: Positively correlated w/ GDP. * Financial markets and intermediaries * Political stability, rule of law, and property rights * Investment in human capital * Tax and regulatory systems: All else equal, lower taxes and lower regulatory burdens increase economic growth. * Free trade and unrestricted cash flows: Positively correlated w/ GDP growth and levels.

Answer 48

GDP when the economy is at full employment. It is the maximum output of an economy w/o putting upward pressure on prices. ## Footnote * In the short-term, the difference between actual and potential GDP is useful for predicting fiscal and monetary policy.

Answer 49

False, the rate of aggregate stock market appreciation is limited to the sustainable growth rate of the economy. Aggregate corporate earnings grows as the share of corporate earnings in GDP grows, however at some point the share of corporate earnings in GDP will stop growing because labor will be unwilling to work for a lower and lower proportion of GDP.

Answer 50

A model used to calculate expected returns for a stock, stock index, or market as a whole. Calculation: ER = dividend yield + expected capital gains yield OR ER= dividend yield + Real EPS growth + inflation + change in shares outstanding + expected repricing ## Footnote * Dividend yields tend to be stable over time.

Answer 51

EPS growth (change in EPS) + expected repricing (change in P/E)

Answer 52

Real EPS growth + inflation + change in shares outstanding

Answer 53

False, the repricing term fluctuates by increasing when GDP growth is high and decreasing when GDP contracts. However, the repricing term cannot grow forever.

Answer 54

The economic growth of private, small, and medium-sized companies.

Answer 55

False, not always. For public companies, equity returns are significantly affected by dilution (share buybacks, mergers, etc.) However, GDP growth usually leads to higher equity returns.

Answer 56

As potential GDP ↑, future income: current income ↑, this leads to current consumption ↑, which causes current savings to ↓, which means investments must offer higher real rates of return (interest rates) to attract investors.

Answer 57

False, fiscal surplus.

Answer 58

A function that examines the effect of capital investment on economic growth and labor productivity. States that output is a function of labor and capital inputs and their productivity. Calculation: Y = T * K^α * L^(1-α) * α and (1-α)= the share of output allocated to K and L * K= capital * L= labor * T= total factor productivity= technological progress OR Y/L = T * (K/L)^α

Answer 59

True, increasing both capital and labor leads to proportionate increases in output.

Answer 60

Marginal product of capital= The additional output for one additional unit of capital Marginal productivity of capital= the increase in output per worker for one additional unit of capital per laborer. In equilibrium, marginal product of capital and marginal productivity of capital are equal.

Answer 61

Curves that plot labor productivity (output per worker) on the Y-axis and capital per worker on the X-axis. The shift in the curve upward is due to technological progress. Thus, increases in tech can increase output even with diminishing marginal productivity of capital.

Answer 62

False, economies will increase investment in capital as long as marginal productivity of capital > rate of return. When marginal productivity of capital = rate of return, capital deepening stops and labor productivity becomes stagnant.

Answer 63

Growth due to tech change + growth due to capital deepening

Answer 64

True. But, in undeveloped countries, nations often have low capital:labor ratios, which allows them to benefit more (usually in the short-term) from capital deepening.

Answer 65

Forecasting the growth rate in potential GDP for an economy Calculation: ΔY = (ΔT ÷ T) + (α * (ΔK ÷ K)) + [ (1 - α) * (ΔL ÷ L)] * T= tech * α= elasticity of output with respect to K = share of income paid to capital * K= capital * L= labor * (1- α)= elasticity of output with respect to L= share of income paid to labor OR growth rate in potential GDP = long-term growth rate of tech + α*(long-term growth rate of capital) + [ (1 - α) * long term growth rate of labor ]

Answer 66

In practice, levels of capital and labor are forecasted from their long-term trends. Shares of capital and labor are determined from national income accounts. The change in tech is estimated.

Answer 67

This is another way to calculate potential Y. Calculation: Growth rate in REAL potential GDP = long-term growth rate of labor force + long-term growth rate in labor productivity ## Footnote * The long-term growth rate in labor productivity reflects capital deepening and technological progress.

Answer 68

Some countries w/ abundant natural resources have grown quickly, whereas some haven't. Oppositely, some countries w/o many natural resources haven't grown while some have. Countries w/o substantial natural resources can use trade to access those resources. Some economists believe that having abundant natural resources prohibits growth since those countries won't focus on developing other industries. Some economists believe that natural resources drive up demand for that country's resources, which in turn drives up the currency's value. This makes all exports more expensive. This is called Dutch disease.

Answer 69

Quantity of working-aged (16-64) adults available for work. This includes employed and unemployed.

Answer 70

* Demographics * Labor force participation rate * Immigration * Average hours worked

Answer 71

Statistical data relating to the population and particular groups within it. ## Footnote * Older populations will have a smaller labor force, and thus less productivity. Younger populations will have higher potential growth. Since fertility creates laborers, countries w/ low or declining fertility rates will likely face economic growth challenges in the future.

Answer 72

True, immigration can serve as a solution to a declining labor force.

Answer 73

Typically, an increasing labor pool is expected to increase real GDP, however there may be no impact to per capita GDP if the population is also increasing.

Answer 74

Human capital is knowledge and skills. Human capital and GDP growth have a positive correlation. Increased human capital can lead to new innovation which allow the economy to operate more efficiently.

Answer 75

Physical capital is infrastructure, computers, and telecommunications. There is a strong positive correlation between investment in physical capital and GDP growth rates. Since many countries still have low capital:labor ratios, the diminishing marginal capital affects are not too prevalent. Also, if capital investment furthers tech growth then that will always allow an economy to grow. ## Footnote * Physical capital can be information and communication technology (ICT) and non-ICT. ICT increases GDP growth more than non-ICT.

Answer 76

Tech development can include investment in both physical and human capital. Tech development has a strong positive correlation with GDP. ## Footnote * When looking for countries that benefit the most from tech advances, look for the country w/ the lowest alpha.

Answer 77

Public infrastructure helps enhance total productivity of an economy by complementing private investment and increasing total factor productivity (tech growth).

Answer 78

* Classical growth theory * Neoclassical growth theory * Endogenous growth theory

Answer 79

This theory is based on economics from Thomas Malthus, and believes that in the long-term, there is a subsistence level of real GDP per capita. If real Y per capita rises above the subsistence level, there will be diminishing marginal returns to labor which reduces productivity and drives Y back to the subsistence level. If Y per capita falls below the subsistence level, families will have excess money so they will have more kids, which increases the population, therefore driving the economy back to the subsistence level. ## Footnote * Believes that improvements in tech create short-term economic growth.

Answer 80

This theory is based on an economy's long-term steady state growth rate. In this theory, economic growth is independent of population growth. Capital deepening occurs but does not affect the growth rate of an economy in the long-run under this theory, it only affects output. It may temporarily increase the growth rate in the short-term. ## Footnote *** Neoclassical growth theory concludes that capital accumulation affects the level of output but not the long-run growth rate. Neoclassical theory basically says that capital accumulation will affect the size of GDP but not the growth rate which is only affected by tech innovation.***

Answer 81

When the output-to-capital ratio in an economy is constant and capital-to-labor and output per capita is growing at the equilibrium growth rate. In the steady state, marginal product of capital MPK = (αY÷K) is constant. But there is diminishing marginal productivity of capital.

Answer 82

g = growth rate in tech ÷ (1 - α) * (1 - α)= labor's share of GDP ## Footnote * g is not affected by capital. Thus, k doesn't contribute to sustainable growth.

Answer 83

G = [ growth rate in tech ÷ (1 - α) ] + ΔL * ΔL = growth of laborG is not affected by capital.

Answer 84

This theory believes that tech growth can be permanent and is a result of investment in human and physical capital. This theory focuses on social benefits. Tech progress enhances productivity of both labor and capital. Under this theory, there IS NOT a steady state so increased investment in capital can permanently increase the rate of growth. This theory states that returns to K are constant. This theory also believes that an increase in savings will permanently increase the growth rate. Under this theory, private firms often fail to consider external social benefits and hence will not invest in the optimal level of R&D for the economy as a whole. ## Footnote * Under this theory, economies can growth through tech innovation and capital deepening

Answer 85

Since less developed countries experience much lower output per capita then developed countries, convergence theories attempt to explain whether productivity and hence living standards will converge over time.

Answer 86

States that less-developed countries will converge to the level of output per capita of developing countries. ## Footnote * Not supported by neoclassical economics. * The neoclassical model assumes that every country has access to the same technology. This leads to countries having the same growth rates but not the same per capita income and as such, the neoclassical model does not imply absolute convergence.

Answer 87

The convergence in living standards will only occur for countries with the same savings rates, population growth rates, and production functions. Under the conditional convergence hypothesis, the growth rate will be higher for less developed countries until they catch up and achieve a similar standard of living. Under the neoclassical model, once a developing country's standard of living converges with that of developed countries, the growth rate will then stabilize to the same steady state growth rate as that of developed countries. ## Footnote * Supported by neoclassical models. * The conditional convergence hypothesis contends that convergence of living standards requires countries to have the same population growth rates.

Answer 88

Under this hypothesis, countries may be part of a "club" (i.e., countries with similar institutional features such as savings rates, financial markets, property rights, health and educational services, etc.). Under club convergence, poorer countries that are part of the club will grow rapidly to catch up with their richer peers. Countries can "join" the club by making appropriate institutional changes. Those countries that are not part of the club may never achieve the higher standard of living. ## Footnote * Empirical evidence shows that developing economies often (but not always) reach the standard of living of more developed ones. Over the past half century, about two-thirds of economies with a lower standard of living than the United States grew at a faster pace than the United States. Though they have not converged to standard of living of the United States, their more rapid growth provides at least some support for the convergence hypothesis. The club convergence theory may explain why some countries that have not implemented appropriate economic or political reforms still lag behind.

Answer 89

* Increased investment from foreign savings * Allow countries to specialize and create a comparative advantage. * Allows for economies of scale. * Sharing of tech between countries, which leads to greater total factor productivity. * Increased competition, leading to firms failing and reallocation of their assets to more efficient uses.

Answer 90

Regulations are required when there are market failures: the presence of market inefficiencies. Regulation is needed in the presence of informational frictions, externalities, weak competition, and social objectives.

Answer 91

When info is not equally available or distributed.

Answer 92

When some market participants have access to info unavailable to others.

Answer 93

Costs or benefits that affect a party that did not choose to incur that cost or benefit. Ex: Tragedy of the commons.

Answer 94

These are goods & services like police, roads, etc., that can be enjoyed by one person w/o making it unavailable to others. Regulations are needed here since the people using these goods/services do not bear a cost.

Answer 95

This provides an essential framework to facilitate business-making decisions. This includes company law, bankruptcy law, etc. Essentially the rules of business. Regulatory framework may help or hinder commerce.

Answer 96

This prevents failures of the financial system and ensures the integrity of the markets. There are three goals w/ regulating financial markets: 1. Protect investors. 2. Create confidence in the markets. 3. Enhance capital formation.

Answer 97

* Disclosure requirements that provide transparency (reduce info asymmetry) and promote investor confidence. * Mitigating agency problems inherent in financial intermediaries acting as agents. * Protection for small investors (uneducated investors).

Answer 98

Monitoring and regulation of financial institutions to reduce economy-wide risks. Bank failures can have contagious effects.

Answer 99

When firms facing strict regulations move their business to less-strict regulatory environments.

Answer 100

Restrict activities that reduce competition. Antitrust regulators often reject M&A activity that would create a concentration of market share. Antitrust regulation may include regulating the pricing policies of firms.

Answer 101

1. Statues: Laws made by levitative bodies. 2. Administrative regulations: Rules issued by government agencies. 3. Judicial law: Interpretations of law- findings of the court.

Answer 102

* Government agencies * Independent regulators * Self-regulating organizations (These are types of independent regulators) * Outside bodies: Organizations that create standards that are referenced by regulators. Ex: FASB and IASB.

Answer 103

Regulators recognized by government agencies that have the power to create and enforce rules. However, independent regulators are not usually funded by the government.

Answer 104

A type of independent regulator. Private organizations that represent as well as regulate their members. SRBs may have inherent conflicts of interest. However, SRBs typically have industry expertise.

Answer 105

SRBs that are recognized and given power by the government. SROs are independent regulators.

Answer 106

The theory that at some point every regulatory body will be influenced or even controlled by the industry it is regulating. Since most regulators have experience in the industry they are regulating they are unable to provide impartial judgements. More likely to be seen in SROs than in government agencies.

Answer 107

When regulatory differences between jurisdictions entice regulators to compete with each other for the most business-friendly regulatory environment.

Answer 108

True, w/o cooperation businesses will just relocate to the more lax environment.

Answer 109

1. Price mechanisms 2. Restricting or requiring certain activities 3. Provision of public goods (national defense) or financing of private projects (SBA loans)

Answer 110

Taxes or subsidies

Answer 111

False, there is a cost to the private sector. Costs are easier to quantify compared to benefits.

Answer 112

The cost of compliance for the regulated entity.

Answer 113

Direct costs of implementation, less private benefits resulting from implementation, plus the indirect cost of changes in economic behavior resulting from implementation. Regulatory burden - the private benefits of regulation ## Footnote * Only when private benefits are underestimated would the actual net regulatory burden be less than the estimated. * Indirect costs are often more substantial than implementation costs

Answer 114

* Regulation can significantly impact valuation. * Taxes shrink an industry, whereas subsidies help it grow. * Make sure to review proposed regulations. * Is regulator captive (regulatory capture)? * Different types of regulations affect different industries.

Answer 115

If:(Rd - Rf) < (forward - spot) → borrow domesticIf:(Rd - Rf) > (forward - spot) → borrow foreignRd= rate on domestic currencyRf= rate on foreign currency

Answer 116

(1 + Rd) - [ ( (1 + Rf) * forward(d/f) ) ÷ spot(d/f) ]If the sign is negative, borrow domestic. If the sign is positive, borrow foreign.

Answer 117

False, knowledge capital is NOT subject to diminishing marginal returns. Investment in labor and physical capital do exhibit diminishing returns, which are reflected in the shape of the productivity curve.

Answer 118

TRUE. But in the long run, stock market appreciation depends only on GDP growth rate as the other two factors cannot increase (or decrease) in perpetuity.

Answer 119

True. Ex: From 2000–2010, Country A’s labor productivity grew by 2.4% per year, of which 0.6% came from TFP growth and 1.8% from capital deepening (2.4% − 0.6% = 1.8%).

Answer 120

False, the country w/ the highest alpha indicates the country that benefits the most from capital deepening.

Answer 121

* Prudential supervision * Financial stability * Market integrity * Economic growth

Answer 122

False, as COGS goes up, inventory goes down

CFA L2 Econ Flashcards

(157 cards)