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CFA II > Economics > Flashcards

Economics Flashcards

1
Q

What is the formula for calculating the forward rate under uncovered interest rate parity?

A

F = S x (1+(Rp-Rb))

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2
Q

What will be the effect of high interest rates under the international parity relationship theory?

A

A high interest rate will be offset by depreciation, so excess cannot be earned by investing in foreign currencies.

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3
Q

What does the flow mechanism theory say will happen as a result of a current account deficit?

A

That a current account deficit will lead to local currency depreciation.

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4
Q

What does capital account theory say will happen as a result of a current account deficit?

A

That a current account deficit will lead to capital inflows and local currency appreciation.

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5
Q

What does portfolio compensation theory say?

A

That investors will rebalance their portfolio if they have accumulated too much of a currency.

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6
Q

What is the PPP theory of exchange rates?

A

That countries with higher inflation will depreciate relative to countries with low inflation.

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7
Q

What is the calculation for forward spread if given:

a) Spot Bid
b) Spot Ask
c) Bid Spread
d) Ask Spread

A

Forward Spread = (Spot Bid - Bid Spread) - (Spot Ask - Ask Spread)

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8
Q

How do you calculate all in rate given the spot rate and a spread?

A

All In = Spot - Spread/10,000

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9
Q

What skewness and kurtosis do carry trades have?

A

Negative skewness and excess kurtosis.

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10
Q

What is the relationship between long-term stock market growth and long-term GDP growth?

A

Long-term stock market growth is limited to long-term GDP growth.

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11
Q

What is the formula for Real GDP under the total factor productivity model?

A

Real GDP = △TFP + wL(△L) + wC(△C)

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12
Q

What is the formula for output growth under neoclassical theory?

A

Output Growth = Productivity Growth / (1-Elasticity of Capital) + Population Growth

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13
Q

Which theory supports the idea that R&D may have growth benefits and should therefore be subsidised by the government?

A

Endogenous Growth Theory.

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14
Q

What is the classical growth theory?

A

Classical growth theory says that growth in real GDP is temporary, and that when GDP per capita rises above subsistence level there is a population explosion, and GDP per capita is then driven back to subsistence.

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15
Q

What is neoclassical growth theory?

A

Neoclassical growth theory says that sustainable GDP growth is a function of population growth, labor’s share of income, and the rate of technological advance.

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16
Q

What is the real interest rate parity condition?

A

It is the theory that real interest rates will converge to the same level across all markets.

17
Q

Who issues statute laws?

A

Legislative bodies.

18
Q

Who issues administrative regulations?

A

Government agencies or authorised bodies.

19
Q

What is regulatory capture?

A

Where a regulator is influenced or controlled by the industry which it is regulating.

20
Q

What are the two forms of regulatory arbitrage?

A
  1. Exploiting the difference between the substance and the interpretation of the law.
  2. Moving operations to a region with less strict regulations.
21
Q

What is regulatory competition?

A

Where regions compete to be the most business-friendly.

22
Q

Which theory says that capital accumulation affects the level of output but not the long-run growth rate?

A

Neoclassical theory.

23
Q

When the market is in equilibrium, what is the formula for rental capital/ marginal cost of capital?

A

MCC = k x Current GDP / Capital Base

24
Q

Does the asset market model approach focus on fiscal or monetary policy?

A

Fiscal policy.

25
Q

What does relative purchasing power parity say?

A

That future exchange rates are driven by inflation.

26
Q

What does the international fisher relationship say?

A

That inflation differential is driven by interest rate differential.

27
Q

What conditions must hold for uncovered interest parity to hold?

A

Relative purchasing power parity and the international fisher relationship.

28
Q

What does absolute PPP say, and is it used to estimate exchange rates?

A

Absolute PPP says that the price of a good should not differ in different countries. It is not used to estimate exchange rates.

29
Q

Can an individual broker change the bid/ask spread of a currency?

A

No.

30
Q

What is the relationship between government spending and exchange rate?

A

High government spending = High Interest Rates = High Exchange Rates

31
Q

What are the three factors affecting the impact of a current account deficit on local currency?

A
  1. Size of local currency.
  2. Influence of exchange rates on domestic prices of internationally traded goods.
  3. Elasticity of exports and imports.
32
Q

What is the definition of hyperinflaton?

A

3-year cumulative inflation of 100%.

33
Q

What is the formula for inflation, given the real interest rate and nominal interest rate?

A

Inflation = 1 + Nominal / 1 + Real

CFA II (11 decks)

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