CFA: Books 1 & 2 (Ethics, stats, econ)

LRAS

All input costs can vary in the long run and the LRAS curve is perfectly inelastic (vertical line) -in long run, wages and other input prices change proportionally to the price level, so price level has no long-run effect on aggregate supply. We refer to this level of output as potential GDP or full-employment GDP

4 Examples of oscillators include:

1) Rate of change oscillator- an ROC or momentum oscillator is calculated as 100 times the difference between the latest closing price and the closing price n periods earlier. Thus, it oscillates around zero. Buy when oscillator changes from negative to positive during an uptrend in prices or sell when ROC changes from + to - during a downtrend. Can oscillate around 100 too using diff prices. 2) Relative strength index- an RSI is based on the ratio of total price increases to total price decreases over a selected number of periods. This ratio is then scaled to oscillate bw 0 and 100, with high values (typically greater than 70) indicating an overbought market and low values (less than 30) indicating an oversold market. 3) Moving average convergence/divergence: MACD oscillators are drawn using exponentially smoothed moving averages, which place greater weight on more recent observations. The MACD line is the difference bw two exponentially smoothed moving averages of the price, and the signal line is an exponentially smoothed moving average of the MACD line. The lines oscillate around zero but are not bounded. MACD line crossing above the smoother signal line is viewed as a buy signal and the MACD line crossing below the signal line is viewed as a sell signal 4) Stochastic oscillator- calculated from the latest closing price and highest and lowest prices reached in a recent period. In a sustainable uptrend, prices tend to close nearer to the recent high, and in a sustainable downtrend, prices tend to close nearer to the recent low. Use two lines that are bounded by 0 and 100.

the lag between recessionary or inflationary conditions in the economy and the impact on the economy of fiscal policy changes can be divided into three types:

1) Recognition lag: discretionary fiscal policy decisions are made by a political process. The state of the economy is complex, and it may take policymakers some time to recognize the nature and extent of the economic problems 2) action lag: the time governments take to discuss, vote on, and enact fiscal policy changes 3) impact lag: the time bw enactment of fiscal policy changes and when the impact of the changes on the economy actually takes place. It takes time for corporations and individuals to act on the fiscal policy changes, and fiscal multiplier effects occur only over time as well these lags make fiscal policy counterproductive

2 pricing strategies that are possible for a monopoly firm are:

1) Single-price: charge the same price to all customers 2) Price discrimination: charge different prices to different customers for same good/service. Motivation is to capture more consumer surplus as economic profit than is possible by charging a single price

several key roles of central banks:

1) Sole supplier of currency: central banks have the sole authority to supply money. After money not backed by good, money supplied by the central bank was deemed legal tender by law. Money not backed by any tangible value is termed fiat money. As long as fiat money holds its value over time and is acceptable for transactions, it can continue to serve as a medium of exchange 2) Banker to the government and other banks: central banks provide banking services to the government and other banks in the economy 3) Regulator and supervisor of payment system: central banks may regulate the banking system by imposing standards of risk taking allowed and reserve requirements of banks under its jurisdictions oversee international transactions 4) Lender of last resort: central banks' ability to print money allows them to supply money to banks with shortages, and this government backing tends to prevent runs on banks (large scale withdrawals) by assuring depositors their funds are secure 5) Holder of gold and foreign exchange reserves: central banks are often the repositories of the nation's gold and reserves of foreign currencies 6) Conductor of monetary policy: central banks control or influence the quantity of money supplied in an economy and growth of money supply over time

based on the above analysis, theres 3 possible outcomes of a decrease in the price of Good X:

1) The substitution effect is positive, and the income effect is also positive: consumption of Good X will increase 2) The substitution effect is positive, and the income effect is negative but smaller than the substitution effect: consumption of good X will increase 3) The substitution effect is positive, and the income effect is negative and larger than the substitution effect: consumption of good X will decrease

3 reasons for holding money:

1) Transaction demand: money held to meet the need for undertaking transactions. As the level of real GDP increases, the size and number of transactions will increase, and the demand for money to carry out transactions increases 2) Precautionary demand: money held for unforeseen future needs; higher for larger firms and increases with the size of the economy 3) Speculative demand: money that is available to take advantage of investment opportunities that arise in the future. Inversely related to returns available in the market. Demand for money for speculative reasons is positively related to perceived risk in other financial instruments (if high, rather hold money than invest) Lower interest rates: firms and households choose to hold more money. At higher interest rates, the oopportunity cost of holding money increases, and firms and households will desire to hold less money and more interest-bearing financial assets

3 forms of spending tools:

1) Transfer payments, also known as entitlement programs, redistribute wealth, taxing some and making payments to others. -examples: Social security and unemployment insurance benefits. -not included in GDP calculations 2) Current spending: refers to government purchases of goods and services on an ongoing and routine basis 3) Capital spending: refers to government spending on infrastructure, such as roads, schools, bridges, and hospitals. Capital spending is expected to boost future productivity of the economy

We need to consider 3 aggregate supply curves with different time frames:

1) Very short-run aggregate supply (VSRAS) curve 2) The short run aggregate supply (SRAS) curve 3) The long run aggregate supply (LRAS) curve

central bank can affect short-term interest rates by increasing or decreasing the money supply:

1) an increase in the money supply (shift of Ms curve to the right) will put downward pressure on interest rates. 2) a decrease in the money supply leads to excess demand for money balances resulting in sales of securities and increasing the interest rate

Bc monopolists produce less than the optimal quantity, gov't regulation may be aimed at improving resource allocation by regulating the prices monopolies may charge. This may be done through 2 things

1) average cost pricing-the most common form of regulation. Forces monopolists to reduce price to where the firm's ATC intersects the market demand curve. This will: a) Increase output and decrease price b) Increase social welfare (allocative efficiency) c) Ensure the monopolist a normal profit bc price = ATC 2) marginal cost pricing (efficient regulation) - forces the monopolist to reduce point to where the firm's MC curve intersects the market demand curve. This increases output and reduces price, but causes the monopolist to incur a loss because price is below ATC- solution is a subsidy

capital account comprises two sub-accounts:

1) capital transfers: includes debt forgiveness and goods and financial assets that migrants bring when they come to a country or take with them when they leave. Also gift and inheritance taxes, death duties, etc. 2) sales and purchases of non-financial assets that are not produced assets include rights to natural resources and intangible assets, such as patents, copyrights, trademarks, franchises, and leases

buy side- consists of the many buyers of foreign currencies and forward FX contracts:

1) corporations - hedge the risk of expected future receipts and payments denominated in foreign currencies 2) investment accounts: real money accounts- mutual funds, pension funds, insurance companies, and other institutional accounts that do not use derivatives. Leveraged accounts- various types of investment firms that do use derivatives including hedge funds, firms that trade for their own accounts, and other trading firms of various types 3) governments and government entities- sovereign wealth funds, pension funds, central banks (to affect exchange rates in the short term in accordance with government policy) 4) retail market - refers to FX transactions by households and relatively small institutions and may be for tourism, cross-border investment, or speculative trading

monetary policy and fiscal policy may be either contractionary or expansionary so there are four possible scenarios:

1) expansionary fiscal and monetary policy: the impact will be highly expansionary. i.r. will usually be lower and the private and public sectors will both expand 2) contractionary fiscal and monetary policy: AD and GDP would be lower, and i.r. would be higher due to tight monetary policy. Both the private and public sectors would contract 3) expansionary fiscal policy and contractionary monetary policy: AD would likely be higher while i.r. will be higher (due to increased government borrowing and tight monetary policy. G as a proportion of GDP will increase 4) contractionary fiscal policy and expansionary monetary policy: interest rates will fall from decreased government borrowing and from the expansion of the Ms, increasing both private consumption and output. G as a proportion of GDP will decrease due to contractionary fiscal policy. The private sector would grow as a result of lower interest rates

IMF categorizes exchange rate regimes into the following types (the first 2 r for countries that don't issue own currencies and remaining 6 r for ones that do):

1) formal dollarization: a country can use the currency of another country. Country cannot have its own monetary policy, as it does not create money 2) monetary union: a country can be a member of this in which several countries use a common currency 3) currency board arrangement- an explicit commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate. 4) Conventional fixed peg arrangement- a country pegs its currency within margins of +/- 1% versus another currency or a basket that includes the currencies of its major trading or financial partners. -direct intervention: monetary authority can maintain exchange rates by purchasing or selling foreign currencies in the foreign exchange markets -indirect intervention: changes in interest rate policy, regulation of foreign exchange transactions, and convincing ppl to constrain foreign exchange activity 5) crawling peg- the exchange rate is adjusted periodically, typically to adjust for higher inflation versus the currency used in the peg (termed a passive crawling peg) versus an active crawling peg- a series of exchange rate adjustments over time is announced and implemented 6) management of exchange rates within crawling bands- the width of the bands that identify permissible exchange rates is increased over time. Can be used to transition from a fixed peg to a floating rate when the monetary authority's lack of credibility makes an immediate change to floating rates impractical 7) managed floating exchange rates- monetary authority attempts to influence the exchange rate in response to specific indicators such as the BOP, inflation rates, or employment w/o any specific target exchange rate or predetermined exchange rate path 8) independently floating- the exchange rate is market-determined and foreign exchange market intervention is used only to slow the rate of change and reduce short-term fluctuations, not to keep exchange rates at a target level

financial account comprises two sub-accounts:

1) government-owned assets abroad include gold, foreign currencies, foreign securities, reserve position in the IMF, credits and other long term assets, direct foreign investment, and claims against foreign banks 2) foreign-owned assets in the country are divided into foreign official assets and other foreign assets in the domestic country

Some of the reasons for trade restrictions that have support from economists are:

1) infant industry- protection from foreign competition is given to new industries to give them an opportunity to grow to an internationally competitive scale and get up the learning curve in terms of efficient production methods 2) national security- even if imports are cheaper, it may be in the country's best interest to protect producers of goods crucial to the country's national defense so that those goods are available domestically in the event of a conflict

High inflation leads to 2 types of costs:

1) menu costs- costs to businesses of constantly having to change their prices 2) shoe leather costs - costs to individuals of making frequent trips to the bank so as to minimize their holdings of cash that are depreciating in value due to inflation

current account comprises three sub-accounts

1) merchandise and services 2) income receipts- include foreign income from dividends and interest pmts 3) unilateral transfers- one way transfers of assets, such as money received from those working abroad and direct foreign aid.

budget surplus vs budget deficit

Budget surplus occurs when government tax revenues exceed expenditures Budget deficit occurs when government expenditures exceed tax revenues Increase a budget deficit, overall demand, economic growth, and employment? Lower taxes and increased government spending ; higher taxes and decreased G for decrease *budget deficits are increased in response to recessions and budget deficits are decreased to slow growth when inflation is too high

5 additional macroeconomic issues may hinder usefulness of fiscal policy:

1) misreading economic statistics: the full employment level for an economy is not precisely measurable. If the government relies on expansionary fiscal policy mistakenly at a time when the economy is already at full capacity, it will simply drive inflation higher 2) crowding out effect: expansionary fiscal policy may crowd out private investment, reducing the impact on AD 3) supply shortages: if economic activity is slow due to resource constraints (low availability of labor or other resources) and not due to low demand, expansionary fiscal policy will fail to achieve its objective and will probably lead to higher inflation 4) limits to deficits: there is a limit to expansionary fiscal policy. If the markets perceive that the deficit is already too high as a proportion of GDP, funding the deficit will be problematic. This could lead to higher interest rates and actually make the situation worse 5) multiple targets: if the economy has high unemployment coupled with high inflation, fiscal policy cannot address both problems simultaneously

monetary policy is implemented using the monetary policy tools of the central bank. The three main policy tools of central banks are as follows:

1) policy rate: in the US, banks can borrow funds from the Fed if they have temporary shortfalls in reserves. The rate at which banks can borrow reserves from the Fed is termed the discount rate. For the European central bank (ECB), it is called the refinancing rate one way to lend money to banks is through a repurchase agreement: the central bank purchases securities from banks that, in turn, agree to repurchase the securities at a higher price in the future. Bank of England uses this method, and its policy rate is called the two week repo (repurchase) rate. In the U.S., the federal funds rate is the rate that banks charge each other on overnight loans of reserves. Uses open market operations to move towards the target rate 2) reserve requirements: by increasing the reserve requirement (the percentage of deposits banks are required to retain as reserves), the central bank effectively decreases the funds that are available for lending and the money supply, which will tend to increase interest rates. A decrease in the reserve requirement will increase the funds available for lending and the money supply, which will tend to decrease interest rates. Tool only works well to increase the money supply if banks are willing to lend and customers are willing to borrow 3) open market operations: buying and selling of securities by the central bank is referred to as open market operations. When the central bank buys securities, cash replaces securities in investor accounts, banks have excess reserves, more funds are available for lending, the money supply increases, and interest rates decrease. Sales of securities by the central bank have the opposite effect. In the US, open market operations are the Fed's most commonly used tool and are important in achieving the federal funds target rate

7 standards of professional conduct?

1) professionalism 2) integrity of capital markets 3) duties to clients 4) duties to employers 5) Investment analysis, recommendations, and actions 6) conflicts of interest 7) Responsibilities as a CFA institute member or CFA candidate

types of trade restrictions include:

1) tariffs: taxes on imported good collected by the government 2) quotas: limits on the amount of imports allowed over some period 3) export subsidies: government payments to firms that export goods 4) minimum domestic content: requirement that some percentage of product content must be from the domestic country 5) voluntary export restraint: a country voluntarily restricts the amount of a good that can be exported, often in the hope of avoiding tariffs or quotas imposed by their trading partners

money multiplier =

1/reserve requirement

record retention: members must

develop and maintain appropriate records to support their investment analyses, recommendations, actions, and other investment-related communications with clients and prospective clients *maintain research records that support the reasons for analyst's conclusions -such records are property of the firm *all communication with clients through any medium must be retained *member who changes firms must re-create the analysis documentation supporting their recommendation using publicly available info and must not rely on memory or materials created at previous firm *standard recommends a 7 year minimum holding period *recordkeeping requirement is generally the firm's responsibility

short-term fluctuations in the participation ratio can occur because of changes in the number of

discouraged workers- those who are available for work but are neither employed nor actively seeking employment -participation rate tends to increase when the economy expands and decrease during recessions -discouraged workers who stopped seeking jobs during recession are motivated to seek work again once the expansion takes hold and they believe their prospects of finding work are better -this movement of discouraged workers in and out of labor force causes the unemployment rate to be a lagging indicator of the business cycle. -firms slow to hire or lay off workers at business cycles also reason unemployment rate tends to lag the business cycle

Unitary elasticity

elasticity = 1. A 1% increase in price leads to a 1% decrease in quantity demanded (Qd). **Total revenue is maximized at this price. moving away towards elastic or inelastic will both decrease total revenue

Perfectly elastic demand:

elasticity = infinite. at any higher price, Qd decreases to zero When one or more goods are very good substitutes for the good in question, demand will tend to be very elastic

conduct as participants in CFA programs: members must not

engage in any conduct that compromises the reputation or integrity of CFA institute or the FA designation or the integrity, validity, or security of CFA institute programs *members must not engage in any activity that undermines the integrity of the CFA charter. This standard applies to conduct that includes: -cheating on CFA exam or any exam -revealing anything about content of exam questions -not following rules of CFA program -giving confidential info on CFA program to public or candidates -improperly using designation to further personal and professional goals -misrepresenting info on the professional conduct statement

oligopoly

few firms that compete in a variety of ways. In such a market, each firm must consider the actions and responses of other firms in setting price and business strategy. Firms are interdependent. Barriers to entry are high and demand can be more or less elastic than for firms in monopolistic competition Sometimes market power is the result of network effects or synergies that make it very difficult to compete with a company once it has reached a critical level of market penetration. -quantity supplied by the other firms decreases at lower prices, so that the DF's demand curve is related to the market demand curve. -a price decrease by one of the competitive firms, which increases Q(CF) in the short run, will lead to a decrease in price by the dominant firm, and competitive firms will decrease output and/or exit the industry in the long run. the long run result of such a price decrease by competitors below P* would then be to decrease the overall market share of competitor firms and increase the market share of the DF

growth in potential GDP =

growth in labor force + growth in labor productivity

Disciplinary review committee of the CFA institute board of governors

has overall responsibility for the professional conduct program and enforcement of the code of standards

A person who is not working is considered to be unemployed if

he or she is actively searching for work. One who has been seeking work unsuccessfully for several months is referred to as long-term unemployed

Measures of central tendency

identify the center, or average, of a data set. This central point can then be used to represent the typical, or expected, value in the data set. These measures provide an indication of an investment's expected return -arithmetic mean -geometric mean -weighted mean -median -mode

Sustainable rate of economic growth

important bc long-term equity returns are highly dependent on economic growth over time. A country's sustainable rate of economic growth is the rate of increase in the economy's productive capacity (potential GDP)

Price index for personal consumption expenditures

in the US this index is created by surveying businesses rather than consumers and is an alternative measurement of consumer price inflation

hyperinflation

inflation that accelerates out of control. Can destroy a country's monetary system and bring about social and political upheaval

Own-price elasticity (price elasticity of demand) and three formulas?

is a measure of the responsiveness of the quantity demanded to a change in price Own-price elasticity = (% change in quantity demanded) / (% change in price) Price elasticity of demand = (P0/Q0)*(change in Q/change in P) Price elasticity of demand = P(0)/Q(0) * coefficient of price variable When Qd is very responsive to a change in price, we say demand is elastic; when Qd is not responsive to a change in price we say that demand is inelastic

GDP deflator and formula

is a price index that can be used to convert nominal GDP into real GDP, taking out the effects of changes in the overall price level. GDP deflator = (nominal GDP in year t / value of year t output at year t-5 prices) * 100

Effective annual yield (EAY)

is an annualized HPY, based on a 365 day year, that accounts for compound interest. EAY = [(1+HPY)^(365/t)] - 1

Producer price index (PPI) or wholesale price index (WPI)

is available for analysts to observe the PPI for different emerging price pressure. Interested in prices of goods in process

The supply of money

is determined by the central bank (federal reserve in the US) and is independent of the interest rate. This accounts for the vertical (perfectly inelastic supply curve)

money market yield (CD equivalent yield, MMY) and 2 formulas

is equal to the annualized holding period yield, assuming a 360 day year but doesn't account for effects of compounding - assumes simple interest MMY = (360/t)*HPY or MMY = (360*BDY)/[360-(t*BDY)]

verification and the verification requirements

is performed by a third party, not by the firm itself, on a firm-wide basis. This third party verifier must attest that (verification requirements): 1) The firm has complied with all GIPS requirements for composite construction on a firm-wide basis 2) The firm's processes and procedures are established to present performance in accordance with the calculation methodology required by GIPS, the data requirements of GIPS, and in the format required by GIPS

holding period return/yield (HPR/HPY) and formula

is simply the percentage change in the value of an investment over the period it is held. i.e., it is the total return an investment earns bw the purchase date and the sale or maturity date. The actual return an investor will receive if the money market instrument is held until maturity HPY = ((P1 + CF1)/P0) - 1 or HPY = MMY * (t/360)

Narrow money

is the amount of notes (currency) and coins in circulation in an economy plus balances in checkable bank deposits

World Trade organization (WTO)

is the only international organization dealing with the global rules of trade between nations. Main function is to ensure that trade flows as smoothly, predictably, and freely as possible.

a country's debt ratio

is the ratio of aggregate debt to GDP -if the real interest rate on the government's debt is higher than the real growth rate of the economy, then the debt ratio will increase over time (keeping taxes constant)

cycle theory

is the study of processes that occur in cycles, as many things do. Some of the cycle periods favored by technical analysts are 4-year presidential cycles, decennial patterns (10 year cycles), and 54 year cycles called the Kondratieff wave

National income and formula

is the sum of the income received by all factors of production that go into the creation of final output National income = compensation of employees (wages and benefits) + corporate and gov't enterprise profits before taxes + interest income + unincorporated business net income + rent + indirect business taxes - subsidies

Increase current account deficit

lower private savings, larger government deficits, and high rates of domestic investment *low private or gov't savings in relation to private investment in domestic capital requires foreign investment in domestic capital

-one shortcoming of the elasticities approach is that it only considers the microeconomic relationship bw exchange rates and trade balances. It ignores capital flows, which must also change as a result of currency depreciation that improves the balance of trade. The absorption approach is a

macroeconomic technique that focuses on the capital account and can be represented as: BT = Y - E ; where Y = national income or production of goods/services , E = domestic absorption of goods and services, which is total expenditure, and BT = balance of trade -viewed in this way, we can see that income relative to expenditure must increase (domestic absorption must fall) for the balance of trade to improve in response to a currency depreciation. For the balance of trade to improve, domestic saving must increase relative to domestic investment in physical capital (which is a component of E). thus, for a depreciation of the domestic currency to improve the balance of trade towards surplus, it must increase national income relative to expenditure. (i.e., national savings must increase relative to domestic investment in physical capital) -whether currency depreciation has these effects depends on the level of capacity utilization in the economy -when economy is operating at less than full employment, the currency depreciation will increase both expenditures and income and bc part of income increase is saved, national income will increase more than total expenditure, improving the balance of trade -when economy is operating at full capacity (employment), an increase in domestic spending will translate to higher domestic prices, which can reverse the relative price changes of the currency depreciation, resulting in return to the previous deficit in the balance of trade. -a currency depreciation at full capacity does not result in a decline in the value of domestic assets. This decline in savers' real wealth will induce more saving, initially improving balance of trade but as real wealth of savers increases over time, the positive impact on saving will decrease, eventually returning the economy to its previous state and balance of trade

suitability: when members and candidates are responsible for managing a portfolio to a specific mandate, strategy, or style, they must

make only investment recommendations that are consistent with the stated objectives and constraints of the portfolio

responsibilities of supervisors: members must

make reasonable efforts to ensure that anyone subject to their supervision or authority complies with applicable laws, rules, regulations, and the code and standards

performance presentation: when communicating investment performance information, members must

make reasonable efforts to ensure that it is fair, accurate, and complete.

types of targeting central banks do

Central banks have used interest rate targeting, increasing the Ms when specific i.r. rose above the target band and decreasing the Ms (or the rate of money supply growth) when rates fell below the target band. Currently, inflation targeting is the most widely used tool for making monetary policy decisions. 1-3% target inflation rate with the most common being 2% some countries, especially developing countries, use exchange rate targeting- they target a foreign exchange rate bw their currency and another (often the U.S. dollar), rather than targeting inflation the net effect of exchange rate targeting is that the targeting country will have the same inflation rate as the targeted currency and the targeting country will need to follow monetary policy and accept interest rates that are consistent with this goal, regardless of domestic economic circumstances

Oscillator charts can also be used to identify convergence or divergence of the oscillator and market prices. Convergence / divergence occurs when and what do they suggest

Convergence occurs when the oscillator shows the same pattern as prices (both reaching higher highs) divergence occurs when the oscillator shows a different pattern than prices. Convergence suggests the price trend is likely to continue, while divergence may indicate a potential change in the price trend.

when should a firm shut down in the short run? long run?

During the short run, as long as items are being sold for more (price is greater) than their average variable cost, the store should continue to operate to minimize losses. If items are being sold for less than their average variable cost, losses would be reduced by shutting down the business in the short run In the long run, a firm should shut down if the price is less than average total cost, regardless of the relation between price and average variable cost

inelastic

Elasticity <1 : total revenue will increase when price increases. opposite for decrease in price: The % decrease in price is more than the % increase in Qd, resulting, again, in a decrease in total revenue

elastic

Elasticity >1 : a price increase will decrease total revenue since the % decrease in Qd will be greater than the % increase in price, resulting in a decrease in total revenue

Total income can be stated as

GDP = C + Savings + T (taxes paid - transfer pmts received) C + I + G + (X-M) = C + S + T = I + (G-T) + (X-M) *(G-T) is the fiscal balance- the difference bw government spending and tax receipts. (G-T) = (S-I) - (X-M) a gov't deficit (G-T > 0) must be financed by some combination of a trade deficit (X-M < 0) or an excess of private saving or private investment (S-I > 0) *in other words, a fiscal deficit must be financed by a combination of domestic and foreign capital

Solow model or neoclassical model of the contributions of technology, labor, and capital to economic growth is:

Growth in potential GDP = growth in technology + growth in labor (W(L)) + growth in capital (W(C)) Growth in potential per-capita GDP = growth in technology + growth in the capital to labor ratio (W(c))

VSRAS

In the very short run, firms will adjust output without changing price by adjusting labor hours and intensity of use of plant and equipment in response to changes in demand perfectly elastic (horizontal line)

Oscillators

Oscillators are another group of tools technical analysts use to identify overbought or oversold markets. These indicators are based on market prices but scaled so that they "oscillate" around a given value, such as zero, or between two values such as zero and 100.

non-price-based indicators (sentiment indicators)

Sentiment indicators can be used to discern the views of potential buyers and sellers. Market sentiment is said to be "bullish" when investors are expecting an increase in prices and "bearish" when they expect decreasing prices.

elasticities approach

The elasticities approach tells us that currency depreciation will result in a greater improvement in the trade deficit when either import or export demand is elastic. For this reason, the compositions of export goods and import goods are an important determinant of the success of currency depreciation in reducing a trade deficit. -elasticity of demand is greater for goods with close substitutes, goods that represent a high proportion of consumer spending, and luxury goods in general. -currency depreciation will have a greater effect on the balance of trade with elastic demand the condition under which a depreciation of the domestic currency will decrease a trade deficit are given in what is called the generalized marshall-lerner condition: Wx*Ex + Wm*(Em-1) > 0 ; in the case where import expenditures and export revenues are equal (Wx = Wm), this condition reduces to Ex + Em > 1, which is most often cited as the classic Marshall-Lerner condition

Minimum efficient scale and downward/upward sloping segments

The lowest point on the LRATC corresponds to the scale or plant size at which the ATC of production is at a minimum. Under perfect competition, firms must operate at minimum efficient scale in long-run equilibrium and LRATC will = market price Downward-sloping segment of the LRATC: indicates that economies of scale (or increasing returns to scale) are present. Upward-sloping segment of the LRATC: indicates that diseconomies of scale are present. At relatively flat portion of the bottom of the LRATC curve: constant returns to scale

An important principle in technical analysis is the change in polarity

This refers to a belief that breached resistance levels become support levels and that breached support levels become resistance levels.

income approach and formula

Under the income approach, GDP is calculated by summing the amounts earned by households and companies during the period, including wage income, interest income, and business profits Income approach: GDP = national income + capital consumption allowance + statistical discrepancy Two approaches should produce the same result but often don't in practice

When the price of good X decreases, there is a substitution effect and income effect

When the price of good X decreases, there is a substitution effect that shifts consumption towards more of Good X bc the total expenditure on the consumer's original bundle of goods falls when the price of Good X falls, there is also an income effect. The income effect can be toward more or less consumption of good X. *substitution effect always acts to increase the consumption of a good that has fallen in price *income effect can either increase or decrease consumption of a good that has fallen in price

production function can be stated on a per-worker basis by dividing by L:

Y/L = A* f(K/L) ; where Y/L (output per worker, labor productivity) and K/L (physical capital per worker) -labor productivity can be increased by either improving technology or increasing physical capital per worker -production function exhibits diminishing marginal productivity for each individual input, meaning the amount of additional output produced by each additional unit of input declines (holding the quantities of other inputs constant). For this reason, sustainable long-term growth cannot necessarily be achieved simply by capital deepening investment - increasing physical capital per worker over time.

when the price crosses the trendline by what the analyst considers a significant amount

a breakout from a downtrend a breakdown from an uptrend is said to occur. Either a breakout or breakdown may signal the end of the previous trend Breakouts and breakdowns are important bc the trendline is thought to represent a level of support or resistance.

Multinational corporation

a firm that has made foreign direct investment in one or more foreign countries, operating production facilities and subsidiary companies in foreign countries

composite

a grouping of individual discretionary portfolios representing a similar investment strategy, objective, or mandate. Ex. "large cap growth stocks"

Continuation patterns suggest

a pause in a trend rather than a reversal

Deflation

a persistently decreasing price level (negative inflation rate). Commonly associated with deep recessions... most prices are decreasing, so consumers delay purchases bc they believe they can buy the same goods for cheaper in the future. For firms, deflation results in decreasing revenue and increasing real fixed costs

Promissory notes

a promise by the banker to return that gold on demand from the depositor.

GIPS

a set of ethical principles based on a standardized, industry-wide approach. Investment firms can voluntarily follow GIPS in their presentation of historical investment results to prospective clients. These standards seek to avoid misrepresentations of performance. GIPS apply to investment management firms and are intended to serve prospective and existing clients of investment firms. GIPS allow clients to more easily compare investment performance among investment firms and have more confidence in reported performance

Reversal patterns occur when

a trend approaches a range of prices but fails to continue beyond that range. A well-known example is the head-and-shoulders pattern. This pattern suggests the demand that has been driving the uptrend is fading, especially if each of the highs in the pattern occurs on declining volume Double top and triple top patterns are similar to the head-and-shoulders pattern in that they indicate weakening in the buying pressure that has been driving an uptrend. In both cases, the price reaches a resistance level at which selling pressure appears repeatedly, preventing any further increase in the price. Reversal patterns for downtrends are called inverse head-and-shoulders, double bottom, and triple bottom patterns and can be analyzed in the same way as the reversal patterns for uptrends

Unit labor costs

a useful indicator of wages and benefits in terms of productivity and is the ratio of total labor compensation per hour to output units per hour

world bank

a vital source of financial and technical assistance to developing countries around the world. Goal is to fight poverty in middle-income and creditworthy poorer countries (IBRD) and to focus on the world's poorest countries (IDA) -provide low interest loans

securities may have one or more types of risk, and each added risk increases the required rate of return on the security. These 3 types of risk are:

a) Default risk: the risk that a borrower will not make the promised payments in a timely manner b) Liquidity risk: the risk of receiving less than fair value for an investment if it must be sold for cash quickly c) Maturity risk: prices of longer-term bonds are more volatile than those of shorter-term bonds. Longer maturity bonds have more maturity risk.

Factors of production are the resources a firm uses to generate output. Factors of production include:

a) Land - where the business facilities are located b) Labor - includes all workers from unskilled laborers to top management c) Capital - sometimes called physical capital or plant and equipment to distinguish it from financial capital. Refers to manufacturing facilities, equipment and machinery d) Materials - refers to inputs into the productive process, including raw materials or manufactured inputs

Other factors affect demand elasticity in addition to the quality and availability of substitutes:

a) Portion of income spent on a good - the larger the proportion of income spent on a good, the more elastic an individual's demand for that good. b) Time - elasticity of demand tends to be greater the longer the time period since the price change Elasticity is not the slope of the demand curve bc it is based on percentage changes, not on the units that price and quantity are measured in

In the past, a variety of reporting procedures were misleading at best. Some of these misleading practices included:

a) Representative accounts- showing a top-performing portfolio as representative of the firm's results b) Survivorship bias- excluding "weak performance" accounts that have been terminated c) Varying time periods- showing performance for selected time periods with outstanding returns

Responsibilities as a CFA institute member or CFA candidate

a) conduct as participants in CFA programs b) reference to cfa

Investment analysis, recommendations, and actions

a) diligence and reasonable basis b) communication with clients and prospective clients c) record retention

conflicts of interest

a) disclosure of conflicts b) priority of transactions c) referral fees

integrity of capital markets

a) material nonpublic information b) market manipulation

Misrepresentation

a) members and candidates must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities *includes knowingly misleading investors, omitting relevant information, presenting selective data to mislead investors, and plagiarism (using things created by others without crediting the source)

fair dealing

a) members must deal fairly and objectively with all clients when providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities *members can't take shares of an oversubscribed IPO *ensure no client is given preferred treatment. Clients must be treated fairly; doesn't mean equally. Ex. disclose available levels of service, premium vs ordinary treatment. & disseminate new information to all relevant people at the same time

knowledge of the law

a) members must understand and comply with all applicable laws, rules, and regulations (including CFA code of ethics and standards of professional conduct) of any gov't, regulatory org, licensing agency, or professional association governing their professional activities. In the event of conflict, members must comply with the more strict law, rule, or regulation. Members must not knowingly participate or assist in and must dissociate from any violation of such laws, rules, or regulations *any violation of codes and standards will also violate this subsection *bring violation to supervisor or compliance. If no help, dissociate from activity. If still bad, may have to resign from the firm to be in compliance w this standard

Independence and objectivity

a) members must use reasonable care and judgement to achieve and maintain independence and objectivity in their professional activities. Members must not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or another's independence and objectivity *client gifts less likely to compromise independence and objectivity but still must disclose to employer prior to acceptance (if possible, otherwise after) *"token" gifts- these are acceptable. Ones that are a violation: look for clues in questions like "lavish" entertainment and "luxury" accommodations

material nonpublic info

a) members who possess material nonpublic information that could affect the value of an investment must not act or cause others to act on the information *material- if its disclosure would affect the price of a security or if a reasonable investor would want the information before making an investment decision *nonpublic- info not available to the marketplace *under the so-called mosaic theory, reaching an investment conclusion through perceptive analysis of public info combined with non-material nonpublic information is not a violation of this standard *firms should maintain watch, restricted, and rumor lists

Additional compensation arrangements: members must not

accept gifts, benefits, compensation, or consideration that competes with or might reasonably be expected to create a conflict of interest with their employer's interest unless they obtain written consent from all parties involved *if client offers a bonus that depends on the future performance of their account, this is an additional compensation arrangement that requires written consent in advance *if client offers a bonus to reward a member for their account's past performance, this is a gift that requires disclosure to the member's employer to comply with Standard of independence and objectivity

liquidity trap

another situation in which the transmission mechanism may not perform as expected is if demand for money becomes very elastic and individuals willingly hold more money even without a decrease in short-term rates. Such a situation is called a liquidity trap. - increasing growth of the Ms will not decrease short-term rates under these conditions because individuals hold the money in cash balances instead of investing in interest-bearing securities. If an economy is experiencing deflation even though money supply policy has been expansionary, liquidity trap conditions may be present

Automatic stabilizers

are built in fiscal devices triggered by the state of the economy

bollinger bands

are constructed based on the standard deviation of closing prices over the last n periods. An analyst can draw high and low bands a chosen number of standard deviations (typically two) above and below the n-period moving average. The bands move away from one another when price volatility increases and move closer together when prices are less volatile. Prices at or above the upper Bollinger band may be viewed as indicating an overbought market, one that is "too high" and likely to decrease in the near term. Likewise, prices at or below the lower Bollinger band may be viewed as indicating an oversold market, one that is "too low" and likely to increase in the near term.

moving average lines

are frequently used to smooth the fluctuations in a price chart (or a chart of any time series). A moving average is simply the mean of the last n closing prices. The larger the chosen value of n, the smoother the moving average line. In an uptrend, the price is higher than the moving average and in a downtrend, the price is lower than the moving average. Moving average lines are often viewed as support or resistance levels.

Export subsidies

are payments by a government to its country's exporters. Export subsidies benefit producers (exporters) of the good but increase prices and reduce consumer surplus in the exporting country.

volume charts

are usually displayed below price charts with each period's volume shown as a vertical line.

One of the most developed cycle theories is Elliott wave theory

based on the belief that financial market prices can be described by an interconnected set of cycles. "waves" refer to chart patterns; in a prevailing uptrend, upward moves in prices consist of five waves and downward moves occur in three waves. If the prevailing trend is down, downward moves have 5 waves and upward moves have three waves. The sizes of these waves are thought to correspond with Fibonacci ratios. Fibonacci numbers are found by starting with 0 and 1, then adding each of the previous two numbers to produce the next. **ratios of consecutive Fibonacci numbers converge to 0.618 and 1.618 as the numbers in the sequence get larger. These two values are commonly used to project price targets.

Austrian school economists believe

business cycles are caused by governmental intervention in the economy. When policymakers force interest rates down to artificially low levels, firms invest too much capital in long-term and speculative lines of production, compared to actual consumer demand. When these investments turn out poorly, firms must decrease output in those lines, which causes a contraction

neoclassical school economists: believe shifts in both AD and AS are primarily driven by

changes in technology over time. Also believe the economy has a strong tendency toward full employment equilibrium as recession puts downward pressure on the money wage rate, or as over-full employment puts upward pressure on the money wage rate. They conclude that business cycles result from temporary deviations from long-run equilibrium.

business cycle

characterized by fluctuations in economic activity. Real GDP and the rate of unemployment are the key variables used to determine the current phase of the cycle

bc real GDP is less than full employment GDP, we say there is a recessionary gap. A recession is a period of

declining GDP and rising unemployment -classical economists: unemployment drive down wages and increase SRAS to return economy to its full employment level of real GDP -keynesian economists: believe increasing AD through government action is the preferred alternative -both expansionary fiscal policy (inc G or decreasing taxes) and expansionary monetary policy (increasing growth rate of the money supply to reduce interest rates) are methods to increase AD and return real GDP to its potential level when there is an increase in AD, the result is that the equilibrium level of GDP is greater than full employment GDP in the short run. both GDP and price level increase. Economy can operate at this level in the short run but it cannot be maintained in the long run bc the economy always returns to full employment GDP along the LRAS curve

short run

defined in economics as the time period over which some factors of production are fixed for a firm. All factors of production (costs) are variable in the long run

aggregate supply (AS) curve

describes the relationship bw the price level and the quantity of real GDP supplied, when all other factors are held constant. That is, it represents the amount of output that firms will produce at different price levels.

production function and formula

describes the relationship of output to the size of the labor force, the capital stock, and productivity. Y = A * f(L,K) Economic output can be thought of as a function of the amounts of labor and capital that are available and their productivity, which depends on the level of technology available. That is: Y = A * f(L,K) ; where Y (aggregate economic output), L (size of labor force), K (amount of capital available), A (total factor productivity) -the multiplier A is referred to as total factor productivity and quantifies the amount of output growth that is not explained by increases in the size of the labor force and capital. TFP = technological advances or growth in technology

monopoly

only one firm is producing the product and there's no close substitutes. Firm faces a downward-sloping demand curve and has the power to choose the price at which it sells its product. High barriers to entry protect a monopoly producer from competition and firms don't enter the market when seeing the economic profit. -profit maximization involves a trade-off bw price and quantity sold if the firm sells at the same price to all buyers -monopolists will expand output until MR = MC -monopolists are price searchers and have imperfect information regarding market demand. They must experiment with different prices to find the one that maximizes profit -compared to the quantity produced under perfect competition, the quantity produced by a monopolist reduces the sum of consumer and producer surplus by an amount represented by the triangle labeled deadweight loss (DWL) -monopoly is considered inefficient bc the reduction in output decreases the sum of consumer and producer surplus -price discrimination can reduce DWL -perfect price discrimination: DWL = 0 -monopoly firm will produce less output than perfectly competitive industry (& the optimal quantity) but will charge a higher price. don't achieve efficient resource allocation

Monetarists believe that the effect of fiscal stimulus is

only temporary and that monetary policy should be used to increase or decrease inflationary pressures over time. They do not believe that monetary policy should be used in an attempt to influence AD to counter cyclical movements in the economy

Foreign direct investment

ownership of productive resource (land, factories, natural resources) in a foreign country

participation ratio (activity ratio / labor force participation rate)

percentage of the working age population who are either employed or actively seeking employment

For normal goods, income elasticity is

positive - an increase in income leads to an increase in Qd. i.e., the income effect is positive

the LM (liquidity-money) curve portrays the

positive relationship bw real i.r. and income consistent with equilibrium in the money market. Higher real interest rates decrease quantity of real money balances individuals want to hold, so for a given real money supply, equilibrium in the money market requires that an increase in real interest rates be accompanied by an increase in income. The increase in the demand for money from an increase in income can offset the decrease in demand for money from higher real interest rates and restore equilibrium in the money market.

triangles form when

prices reach lower highs and higher lows over a period of time. Trendlines on the highs and on the lows thus converge when they are projected forward. Triangles can be symmetrical (higher lows and lower highs), ascending (higher lows and a resistance level), or descending (lower highs and a support level) Triangles suggest buying and selling pressure have become roughly equal temporarily, but they do not imply a change in direction of the trend. The size of a triangle, or the difference bw the two trendlines at the time when the pattern begins to form, can be used to set a price target, assuming the price breaks out of the triangle and previous trend continues.

sell side

primary dealers in currencies and originators of fwd foreign exchange contracts (large multinational banks)

another reason standard tools for increasing the Ms might not increase economic activity is that even with increasing excess reserves, banks may not be willing to lend. Example credit bubble. With short term rates near zero, economic growth still poor, and a real threat of deflation, central banks began a policy termed

quantitative easing. In the UK Q.E. entailed large purchases of British gov't bonds in the maturity range of three to five years in order to reduce interest rates to encourage borrowing and to generate excess reserves in the banking system to encourage lending. In the U.S., the fed purchased large quantities of T-Bonds (longer maturities, not just short term treasury securities), with the goal of bringing down longer-term interest rates and generating excess reserves to increase lending and economic growth.

Quantity theory of money states that

quantity of money is some proportion of the total spending in an economy and implies the quantity equation of exchange: Money supply*velocity = price*real output (MV = PY) Velocity is the average number of times per year each unit of money is used to buy goods or services. The equation of exchange must hold with velocity defined in this way Monetarists believe that velocity and the real output of the economy change only slowly.

new classical school economists introduced a real business cycle theory (RBC). RBC emphasizes the effect of

real economic variables such as changes in technology and external shocks, as opposed to monetary variables, as the cause of business cycles. Based on utility theory and these economists argue that policymakers should not try to counteract business cycles because expansions and contractions are efficient market responses to real external shocks

flags and pennants refer to

rectangles and triangles that appear on short-term price charts.

bond equivalent yield (BEY) and 2 formulas

refers to 2 x the semiannual discount rate -convert HPY to an effective semiannual yield: [((1+HPY)^n) - 1] * 2 ; always multiplied by 2 BEY = [((1+HPY)^n) - 1] * 2 or BEY = [((1+EAY)^0.5) - 1] * 2

Fiscal policy

refers to a government's use of spending and taxation to influence economic activity. The budget is said to be balanced when tax revenues equal government expenditures

Fiscal policy

refers to a government's use of spending and taxation to meet macroeconomic goals. A government budget is said to be balanced when tax revenues equal government expenditures.

natural monopoly

refers to a situation where the average cost of production is falling over the relevant range of consumer demand. In this case, having two or more producers would result in a significantly higher cost of production and be detrimental to consumers

Voluntary export restraint

refers to a voluntary agreement by a government to limit the quantity of a good that can be exported. Result in a welfare loss to the importing country equal to that of an equivalent quota with no government charge for the import licenses; that is, no capture of the quota rents

Disinflation

refers to an inflation rate that is decreasing over time but remains greater than zero

intermarket analysis

refers to analysis of the interrelationships among the market values of major asset classes, such as stocks, bonds, commodities, and currencies.

Headline inflation

refers to price indexes for all goods.

Core inflation

refers to price indexes that exclude food and energy -food and energy prices are typically more volatile than those of most other goods. -thus, core inflation can sometimes be a more useful measure for the underlying trend in prices

monetary policy and when its said to be expansionary vs contractionary

refers to the central bank's actions that affect the quantity of money and credit in an economy in order to influence economic activity. -said to be expansionary (accommodative or easy), when the central bank increases the quantity of money and credit in an economy -said to be contractionary (restrictive or tight), when central bank is reducing the quantity of money and credit in an economy both monetary and fiscal policy is used by policymakers with the goals of maintaining stable prices and producing positive economic growth.

Discretionary fiscal policy

refers to the spending and taxing decisions of a national government that are intended to stabilize the economy

Effective annual rate (EAR) and equations

represents the annual rate of return actually being earned after adjustments have been made for different compounding periods. The greater the compounding frequency (periods/year), the greater the EAR will be in comparison to the stated rate. EAR = ((1+periodic rate)^t) - 1 where periodic rate = stated annual rate / # of compounding periods per year For continuous compounding, use the formula EAR = (e^r) - 1

Non-accelerating inflation rate of unemployment (NAIRU) or natural rate of unemployment

represents the unemployment rate below which upward pressures on wages is likely to develop. some segments of economy may have trouble finding enough qualified workers even during a contraction. As a result, the NAIRU can be higher than the rate associated with the absence of cyclical unemployment

quota

restricts the quantity of a good imported to the quota amount: domestic producers gain, domestic consumers lose form an increase in the domestic price. if import licenses are sold, the domestic government gains the revenue if the domestic government does not charge for the import licenses, this amount is a gain to those foreign exporters who receive the import licenses under the quota and are termed quota rents

at a resistance level

selling is expected to emerge that prevents further price increases.

aggregate demand (AD) curve

shows the relationship between the quantity of real output demanded (which equals real income) and the price level. If we holding the nominal money supply constant, changes in real money supply are due to changes in the price level P. -an increase in the price level will decrease the real money supply (M/P) and a decrease in the price level will increase the real money supply (M/P) relationship bw price level and real income is downward sloping - this is the aggregate demand curve. -AD curve slopes downwards bc higher price levels (holding the money supply constant) reduces real wealth, increases real interest rates, and make domestically produced goods more expensive compared to goods produced abroad, all of which reduce the quantity of domestic output demanded

Gross national product (GNP)

similar to GDP but measures the total value of goods and services produced by the labor and capital of a country's citizens. The difference is due to non-citizen incomes of foreigners working within a country, the income of citizens who work in other countries, the income of foreign capital invested within a country, and the income of capital supplied by its citizens to foreign countries. *the income to capital owned by foreigners invested within a country is included in the domestic country's GDP but not in its GNP. *The income of a country's citizens working abroad is included in its GNP but not in its GDP GDP more closely related to economic activity within a country and so to its employment and growth Benefits of trade are greater than the costs for economies as a whole

Exchange rate

simply the price or cost of units of one currency in terms of another currency. Often referred to as the base currency and the price currency: 1.25 USD/EUR, USD is price currency and the EUR is the base currency

SRAS

slopes upward bc some input prices will change as production is increased or decreased -we assume in the short run that output prices will change proportionally to the price level but that at least some input prices are sticky, meaning that they do not adjust to changes in the price level in the short run. -when output prices increase, price level increases, but firms see no change in input prices in the short run -firms respond by increasing output in anticipation of greater profits from higher output prices. Result is an upward sloping SRAS curve

Forward discount or forward premium for a currency is calculated relative to the

spot exchange rate. The forward discount or premium for the base currency is the percentage difference bw the forward price and the spot price If forward quote > spot quote , it will take more usd to buy one euro in 90 days so the euro is expected to appreciate versus the dollar and the dollar is expected to depreciate relative to the euro (forward premium) If arbitrage opportunity exists, eventually investors trading transactions will make interest rate parity relation restored

Real exchange rate and formula

tells us that as time passes, the dollar cost of purchasing that same unit of goods and services based on the new (current) exchange rate and the relative changes in the price levels of both countries Real exchange rate = nominal exchange rate * ((CPI(base) / (CPI(price)) ^^ the country with the lower inflation rate will see its real cost of foreign goods increase, unless an appreciation of its currency offsets the inflation differential

keynes school economists believe

that shifts in AD due to changes in expectations were the primary cause of business cycles Keynesian school economists believe these fluctuations are primarily due to swings in the level of optimism of those who run businesses. They overinvest and overproduce when too optimistic and underinvest and under-produce when too pessimistic about future growth in potential GDP Keynesians also argue that wages are "downward sticky", reducing the ability of a decrease in money wages to increase short-run AS and move the economy from recession back toward full employment. Therefore, they believe that to increase aggregate demand, you should do it directly; through monetary policy (increasing the money supply) or through fiscal policy (increasing government spending, decreasing taxes, or both)

deadweight loss

the amount of lost welfare from the imposition of the quota or tariff.

Demand for money

the amount of wealth that households and firms in an economy choose to hold in the form of money

money neutrality

the belief that real variables (real GDP and velocity) are not affected by monetary variables (money supply and prices)

CPI and formula

the consumer price index (CPI) is the best known indicator of U.S. inflation. CPI = ((cost of basket at current prices / cost of basket at base period prices) * 100) - 1

cross rate

the exchange rate bw two currencies implied by their exchange rates with a common third currency. Cross rates are necessary when there is no active FX market in the currency pair cross rate example: USD/AUS = 0.6 , MXN/USD = 10.7 MXN/AUD = USD/AUD * MXN/USD (0.6*10.7=6.42)

fiscal multiplier and formula

the fiscal multiplier determines the potential increase in aggregate demand resulting from an increase in government spending. Is inversely related to the tax rate (higher tax decreases multiplier) and is directly related to the marginal propensity to consume (higher MPC increases the multiplier) fiscal multiplier = 1 / (1 - (MPC*(1-t)) increases in the current deficit mean greater taxes in the future. Consumers may increase current savings and reduce current consumption in order to offset the expected cost of higher future taxes.

one limitation of the N-firm concentration ratio is that it may be relatively insensitive to mergers of two firms with large market shares. the problem is reduced by using an alternative measure of market concentration

the herfindahl-hirschman index (HHI) HHI calculated by taking the sum of the squares of the market shares of the largest firms in the market. Second limitation that applies to both our simple concentration measures is that barriers to entry are not considered in either case.

Marginal product of labor

the increase in production (increase in total product) that will result as we increase the amount of labor employed MPL increases until a point of diminishing marginal productivity of labor, or that labor has reached the point of diminishing marginal returns

M1

the narrowest measure. Is restricted to the most liquid forms of money; it consists of currency in the hands of the public; travelers checks; demand deposits, and other deposits against which checks can be written

the fisher effect states that

the nominal interest rate is simply the sum of the real interest rate and expected inflation: R(nom) = R(real) + E(inflation) *real rates are relatively stable and changes in interest rates are driven by changes in expected inflation. Consistent with money neutrality investors require additional return (a risk premium) for bearing this risk, which we can consider a third component of a nominal interest rate: R(Nom) = R(real) + E(inflation) + RP

inflation rate

the percentage increase in the price level, typically compared to the prior year.

The unemployment rate is

the percentage of people in the labor force who are unemployed

The New Keynesian school added the assertion that

the prices of productive inputs other than labor are also "downward sticky", presenting additional barriers to the restoration of full-employment equilibrium

Production function

the quantity of output that a firm can produce can be thought of as a function of the amounts of capital and labor employed. However, it only considers two inputs: capital and labor

Terms of trade

the ratio of an index of the prices of a country's exports to an index of the prices of its imports expressed relative to a base value of 100. If a country's terms of trade are currently 102, the prices of the goods it exports have risen relative to the prices of the goods it imports since the base period

income elasticity and 3 formulas

the sensitivity of Qd to a change in income is termed this. Income elasticity = % change in Qd / % change in income income elasticity = I(0)/Q(0) * (change in Q / change in I) Income elasticity = I(0)/Q(0) * coefficient of income variable

Keynesian economists believe that fiscal policy

through its effect on AD, can have a strong effect on economic growth when the economy is operating at less than full employment

Breakeven output quantity

total revenue = fixed costs + variable costs, profit = 0

Rectangles form when

trading temporarily forms a range bw a support level and a resistance level. As with a triangle, a rectangle suggests the prevailing trend will resume and can be used to set a price target

Heckscher-ohlin model

two factors of production- capital and labor. The source of comparative advantage (differences in opportunity costs) in this model is differences in the relative amounts of each factor the countries possess *result is that the country that has more capital will specialize in the capital intensive good and trade for the less capital intensive good with the country that has relatively more labor and less capital -there is a redistribution of wealth within each country bw labor and the owners of capital.

Candlestick charts

use the same data as bar charts but display a box bounded by the opening and closing prices. The box is clear if the closing price is higher than the opening price, or filled if the close is lower than the opening price. candlestick charts can make patterns easier to recognize

tariff

when placed on an imported good, it increases the domestic price, decreases the quantity imported, and increases the quantity supplied domestically. Domestic producers gain, foreign exporters lose, and the domestic government gains by the amount of the tariff revenues

rent seeking

when producers spend time and resources to try to acquire or establish a monopoly

Ricardian equivalence

when taxpayers/consumers reduce current consumption and increase current savings by just enough to repay the principal and interest on the debt the government issued to fund the increased deficit, there is no effect on AD. R.E. doesn't hold if taxpayers underestimate their future liability for servicing and repaying the debt, so that AD is increased by equal spending and tax increases

Perfect competition

many firms produce identical products, barriers to entry are very low and firms compete for sales only on the basis of price. competition forces them all to sell at the market price. firms face perfectly elastic demand curves at the price determined in the market. -in a perfectly competitive market, a firm will continue to expand production until marginal revenue (MR) (or market price) = marginal cost (MC) -in pure competition, a firm's marginal revenue is equal to the market price and a firm's MR curve will be identical to its demand curve. -A profit maximizing firm will produce the quantity Q*, when MC=MR -in the short run, economic profit is maximized at the Q for which MR = MC -an economic loss occurs on any units for which MR < MC -firms wont earn economic profits for any significant period of time -new firms will enter industry to earn economic profits, increasing market supply and eventually reducing market price so that it just equals firm's ATC. -in equilibrium, each firm produces the quantity for which P=MR=MC=ATC -if firm is operating at shutdown point, P = AVC -the long-run equilibrium output level for perfectly competitive firms is where MR = MC = ATC, which is where ATC is at a minimum. At this output, economic profit is zero and only a normal return is realized. -the short-run supply curve for a firm is its MC line above the AVC -short-run market supply curve- horizontal sum of the MC curves for all firms in a given industry. Bc firms will supply more units at higher prices, the short-run market supply curve slopes upward to the right

monopolistic competition

many sellers but differentiated products and thus different prices. Demand curve faced by each firm is downward sloping; while demand is highly elastic (due to goods being seen as substitutes), it is not perfectly elastic. -maximize economic profits by producing where MR = MC -price is greater than marginal cost (producers can realize a markup), ATC is not at a minimum for the quantity produced (suggesting excess capacity, or an inefficient scale of production), and the price is slightly higher than under perfect competition -product innovation is a necessary activity as firms in monopolistic competition pursue economic profits -advertising expenses are the highest for firms in monopolistic competition. Could actually decrease a firms avg total cost (if it leads to enough of an increase in sales) -brand names provide info to consumers by providing them w/ signals about quality of brand

A capital consumption allowance (CCA)

measures the depreciation of physical capital from the production of goods and services over a period. Can be thought of as the amount that would have to be reinvested to maintain the productivity of physical capital from one period to the next.

loyalty, prudence, and care

members have a duty of loyalty to their clients and must act with reasonable care and exercise prudent judgement. Members must act for the benefit of their clients and place their clients' interest before their employer's or their own interests.

Misconduct

members must not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects adversely on their professional reputation, integrity, or competence

market manipulation

members must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants *key point is if they intended to mislead; if so, violation of this standard

money

most commonly defined as a generally accepted medium of exchange. Rather than exchanging goods and services directly (bartering), using money facilitates indirect exchange

For inferior goods, income elasticity is

negative - an increase in income leads to a decrease in Qd. Income effect is negative

a budget deficit

occurs when government expenditures exceed tax revenues

Budget surplus

occurs when government tax revenues exceed expenditures

the neutral interest rate and formula

of an economy is the growth rate of the money supply that neither increases nor decreases the economic growth rate: neutral interest rate = real trend rate of economic growth + inflation target when the policy rate is above (below) the neutral rate, the monetary policy is said to be contractionary (expansionary). Contractionary policy is associated with a decrease in the growth rate of money supply, while expansionary policy increases its growth rate monetary policy is often adjusted to reflect the source of inflation

Veblen good

one for which a higher price makes the good more desirable. The idea is that the consumer gets utility from being seen to consume a good that has high status and that a higher price for the good conveys more status and increases its utility. Not an inferior good, both substitution and income effects of a price increase are to decrease consumption of the goods

Ricardian model of trade

only has 1 factor of production - labor. The source of differences in production costs in Ricardo's model is differences in labor productivity due to differences in technology

shifts in the LRAS curve

-LRAS is vertical (perfectly inelastic) at the potential (full employment) level of real GDP -changes in factors that affect the real output that an economy can produce at full employment will shift the LRAS curve

Expected inflation

an additional source of wage pressure

The statistical discrepancy is

an adjustment for the difference between GDP measured under the income approach and the expenditure approach bc they use different data

complements

when an increase in the price of a related good decreases the quantity demanded for a different good, the two goods are said to be complements. CPED negative

Substitutes

when an increase in the price of a related good increases demand for a different good, the two goods are said to be substitutes. *CPED is positive

communication with clients and prospective clients: members must

(1) disclose to clients basic format and general principles of investment processes they use to analyze investments, select securities, and construct portfolios and must properly disclose any changes that might materially affect those processes (2) disclose to clients significant limitations and risks associated with investment process (3) use reasonable judgement in identifying which factors are important to their investment analysis, recommendations, or actions and include those factors in communications with clients and prospective clients (4) distinguish bw fact and opinion in presentation of investment analysis and recommendations *expectations based on statistical modeling and analysis aren't facts will violate standard unless you explain limitations of the model and the assumptions it uses, which provides a context for judging the uncertainty regarding the estimated investment result *members must inform clients about limitations inherent to an investment; 2 ex: (a) liquidity - refers to the ability to exit an investment readily without experiencing a significant extra cost from doing so (b) capacity- refers to an investment vehicle's ability to absorb additional investment without reducing the returns it is able to achieve

diligence and reasonable basis: members must

(1) exercise diligence, independence, and thoroughness in analyzing investments, making investment recommendations, and taking investment actions. (2) have a reasonable and adequate basis, supported by appropriate research and investigation, for any investment analysis, recommendation, or action.

suitability: when members and candidates are in an advisory relationship w a client, they must

(a) make a reasonable inquiry into a client's investment experience, risk and return objectives, and financial constraints prior to making any investment recommendation or taking investment action and must reassess and update this information regularly (b) determine that an investment is suitable to client's financial situation and consistent with the client's written objectives, mandates, and constraints before making an investment recommendation or taking investment action (c) judge suitability of investments in the context of the client's total portfolio

when currencies are freely traded and forward currency contracts exist, the percentage difference bw the forward and spot exchange rates is approximately equal to the difference between the two countries' interest rates . when this relationship (no-arbitrage condition) doesn't hold, there is an arbitrage and opportunity to profit without risk. No-arbitrage relation (interest rate parity):

(forward / spot) = (1 + i.r.(price)) / ( 1 + i.r.(base)) if solving for a forward exchange rate with non-annual interest rates then its: 1 + (i.r./n) ; where n is number of periods in the annual

shutdown and breakeven under imperfect competition

- TR = TC: break even - TC > TR > TVC: firm should continue to operate in the short run but shut down in the long run - TR < TVC: firm should shut down in the short run and the long run

Comparative advantage

- a company is said to have this in the production of a good if it has a lower opportunity cost in the production of that good, expressed as the amount of another good that could have been produced instead. *potential gains from trade as long as the countries' opportunity costs of one good in terms of another are different. Potential gain important result is that total output will increase through trade.

Price index

- can use this as a proxy for the price level when trying to calculate a rate of inflation -measures the average price for a defined basket of goods and services

capital restrictions

- some countries impose these on the flow of financial capital across borders. Restrictions include outright prohibition of investment in the domestic country by foreigners, prohibition of taxes on the income earned on foreign investments by domestic citizens, prohibition of foreign investment in certain domestic industries, and restrictions on repatriation of earnings of foreign entities operating in a country -decrease economic welfare but in the short term they have helped developing countries

Pegging

- when a country chooses a target level of the exchange rate of their currency with that of another country, primarily the U.S. dollar. Pegging country intends to make its inflation rate equal to the inflation rate of the country to which they peg their currency -costs imposed on an economy of unanticipated inflation greater than those of perfectly anticipated inflation when inflation is higher than expected, borrowers gain at the expense of lenders as loan payments in the future are made with currency that has less value in real terms. A second cost of unexpected inflation is that information about supply and demand becomes less reliable. Can also increase the magnitude or frequency of business cycles

shifts in the AD curve

-AD curve reflects the total level of expenditures in an economy by consumers, businesses, governments, and foreigners. A number of factors can affect this level of expenditures and cause the AD curve to shift. **a change in the price level is represented as a movement along the AD curve, not a shift in the AD curve.

when GDP > potential GDP , the difference is called an inflationary gap bc the increase in AD causes upward pressure on the price level

-SRAS curve can shift to the left, returning economy to potential GDP but at a price level that is higher still -gov't policy makers could reduce aggregate demand (decrease G, increase taxes, slow growth rate of money supply) changes in wages or the prices of productive inputs can shift the SRAS curve, affecting real GDP and the price level in the short run. -increase w or inputs shifts the SRAS up and to the left -new equilibrium is at a lower GDP and a higher overall price level for goods -this combination of declining economic output and higher prices is termed stagflation (stagnant economy with inflation) -subsequent decrease in input prices can return economy to its long run equilibrium output -expansionary fiscal or monetary policy can also return the economy to its full employment level, but at a price level that is higher still compared to the initial equilibrium decrease in prices of important productive inputs -increases SRAS (shifts it down and to the right) -short run equilibrium is at a level of GDP greater than full employment GDP and a lower overall price level

economists often focus on changes in the surplus or deficit to determine if the fiscal policy is expansionary or contractionary

-an increase in surplus is indicative of a contractionary fiscal policy -a decrease in surplus is indicative of an expansionary fiscal policy -an increase in deficit is indicative of an expansionary fiscal policy -a decrease in deficit is indicative of a contractionary fiscal policy -an increase (decrease) in a revenue item (sales tax) should be considered contractionary (expansionary) and an increase (decrease) in a spending item (construction of highways) is considered expansionary (contractionary)

*For overall equilibrium, the value of real interest rates and income must be consistent with equilibrium in both the goods market and the money market. Illustrate this simultaneous equilibrium as the intersection of the IS and LM curves.

-an increase in the price level decreases the real money supply and a decrease in the price level increases the real money supply -a greater real money supply reduces equilibrium real interest rates and shifts the LM curve when IS and LM curves are combined, the point at which they intersect represents the levels of the real interest rate and income that are consistent with equilibrium bw income and expenditure (pts along the IS curve) and equilibrium between the real money supply and the real interest rate (pts along the LM curve). Thus the intersection bw the curves determines the equilibrium levels of prices and real income (real GDP0 for a given level of the real money supply

j-curve

-currency depreciation may worsen a trade deficit initially: import and export contracts for the delivery of goods most often require delivery and payment in the future and thus the quantities may be relatively insensitive to currency depreciation in the short run. -importers adjust over time by reducing quantities until M-L condition take effect -this short term increase in the deficit followed by a decrease when the Marshall-lerner condition is met is referred to as the j-curve

disadvantages of fiscal policy tools:

-direct taxes and transfer payments take time to implement, delaying the impact of fiscal policy -capital spending also takes a long time to implement. The economy may have recovered by the time its impact is felt lower incomes save less and consume more-> tax reductions for them better at increasing AD the magnitude of the multiplier effect depends on the tax rate and on the marginal propensity to consume

once the compliance program is instituted, the supervisor should:

-distribute it to the proper personnel -update it as needed -continually educate staff regarding procedures -issue reminders as necessary -require personal conduct evaluations -review employee actions to monitor compliance and identify violations

Most important factors determining the level of a country's imports and exports are:

-domestic GDP growth: if increases, imports rise -GDP growth of trading partners: if increases, exports rise -currency exchange rates: if USD strengthens, imports increase, exports fall

For price discrimination to work, the seller must:

-face a downward sloping demand curve -have at least 2 identifiable groups of customers with different price elasticities of demand for the good -be able to prevent customers paying the lower price from reselling product to customers paying the higher price *as long as the above conditions are met, firm profits can be increased through price discrimination

Verification recommendations:

-firms are encouraged to pursue independent verification; applies to entire firm's performance measurement practices and methods, not a selected composite -verified firms should include the following disclosure in language: "[name of firm] has been verified for the periods [insert dates] by [name of verifier]. A copy of the verification report is available upon request."

A list of things to consider prior to making a recommendation/action:

-global and national economic conditions -a firm's financial results and operating history, and the business cycle stage -fees and historical results for a mutual fund -limitations of any quantitative models used -a determination of whether peer group comparisons for valuation are appropriate

members should encourage their firm to consider these policies and procedures:

-have a policy requiring that research reports have a reasonable/adequate basis -have detailed, written guidance for proper research and due diligence -have measurable criteria for judging the quality of research (base comp on this) -have written procedures that provide a minimum acceptable level of scenario testing for computer-based models -have a policy for evaluating outside providers of info -adopt a set of standards that provides criteria for evaluating external advisers

shutdown and breakeven under perfect competition

-if AR >/= ATC, firm should stay in mkt in both SR and LR -if AR >/= AVC but AR < ATC, the firm should stay in the market in the short run but will exit the market in the long run -if AR < AVC, the firm should shut down in the short run and exit the market in the long run

Short term interest rates are determined by the equilibrium between money supply and money demand

-if i.r. > equilibrium rate, there is excess supply of real money. Firms and HHs are holding more money than they desire to, given the opp cost of holding money balances. They will purchase securities to reduce money balances, which will decrease the interest rate as securities prices are bid up. -if i.r. < equilibrium rate, there is excess demand for real money balances. Firms and HHs will sell securities to increase their money holdings to the desired level, decreasing securities prices and increasing the interest rate

changes in demand, entry and exit, and changes in plant size

-in the short run, an increase in market demand (Md shifts to the right) will increase both equilibrium price and quantity. -if industry is earning economic profits, new firms will enter the market and cause supply to increase (supply curve shifts down and to the right), increasing equilibrium output and decreasing equilibrium price. end result is firm's total revenue and economic profit will decrease -if market is experiencing economic losses, some of the firms will exit the market, causing supply to decrease and equilibrium price to increase. Revenues will increase, reducing any prior economic losses -a permanent change in demand leads to the entry of firms to, or exit of firms from, an industry. -If demand permanently increases, equilibrium price increases and firms earn an economic profit, attracting more firms to enter the market. Supply curve then shifts down and to the right and thus equilibrium price will fall back to its prior level, however, the quantity supplied will increase

Objectives of fiscal policy may include:

-influencing the level of economic activity and aggregate demand -redistributing wealth and income among segments of the population -allocating resources among economic agents and sectors in the economy

Activities that may constitute a violation to loyalty include:

-misappropriation of trade secrets -misuse of confidential information -soliciting employer's clients prior to leaving -self-dealing -misappropriation of client lists

Movements along aggregate demand and supply curves

-movements along these curves reflect the impact of a change in the price level on the quantity demanded and the quantity supplied. Changes in the price level do not alone cause shifts in the AD and AS curves, although we have allowed that changes in expected future prices can

With respect to domestic (importing country), import quotas & tariffs & VERs all: (what is 1 exception?)

-reduce imports -increase price -decrease consumer surplus -increase domestic quantity supplied -increase producer surplus *with one exception, all will decrease national welfare. Quotas and tariffs in a large country could increase national welfare

Commonly cited objectives of capital flow restrictions include:

-reduce the volatility of domestic asset prices maintain fixed exchange rates -keep domestic interest rates low -protect strategic industries

decrease in AD

-reduces both real output and the price level in the short run -new SR equilibrium output, GDP1, is less than potential GDP.

examples of criteria to use in judging quality are:

-review assumptions used -determine how rigorous the analysis was -identify how timely the research is -evaluate objectivity and independence of their recommendations

members must satisfy these requirements to maintain membership:

-sign the PCS annually -pay CFA institute membership dues annually

Desirable attributes of tax policy:

-simplicity to use and enforce -efficiency; having the least interference with market forces and not acting as a deterrent to working -fairness is quite subjective, but two commonly held beliefs are: -horizontal equality: people in similar situations should pay similar taxes -vertical equality: richer ppl pay more in taxes -sufficiency, in that taxes should generate sufficient revenues to meet the spending needs of the gov't

advantages of fiscal policy tools:

-social policies, such as discouraging tobacco use, can be implemented very quickly via indirect taxes -quick implementation of indirect taxes also means that gov't reveneus can be increased without significant additional costs

in addition to price stability, some central banks have other stated goals, such as:

-stability in exchange rates with foreign currencies -full employment -sustainable positive economic growth -moderate long-term interest rates *target inflation rate in most developed countries is a range around 2% to 3%. A target of zero inflation is not used bc that increases the risk of deflation, which can be very disruptive for an economy

Monopolistic competition has following market characteristics:

1) A large number of independent sellers: a) Each firm has a relatively small market share so no individual firm has pricing power b) Firms need only pay attention to average market price, not price of individual competitors c) There are too many firms in the industry for collusion (price fixing) to be possible 2) Differentiated products: each producer has a product that is slightly different from its competitors. Goods are Close to substitutes for one another 3) Firms compete on price, quality, and marketing as a result of product differentiation -quality is significant product-differentiating characteristic -price and output can be set by firms because they face downward-sloping demand curves, but there is usually a strong correlation bw quality and the price that firms can charge -marketing is a must to inform the mkt about product's differentiating characteristics 4) low barriers to entry so that firms are free to enter and exit the market

Since technical analysis is based on changes in supply and demand conditions, indicators of the flow of funds in the financial markets can be useful for observing changes in the supply of securities and the demand for them... 3 other sentiment indicators

1) Arms index or short-term trading index (TRIN) is a measure of funds flowing into advancing and declining stocks. The index is calculated as: TRIN = (number of advancing issues/# of declining issues) / (volume of adv. Issues/vol of decl. issues) -an index value close to one suggests funds are flowing about evenly to advancing and declining stocks. Index values greater than one mean the majority of volume is in declining stocks. Spikes upward have coincided with large daily losses in the stock market and vice versa 2) The mutual fund cash position is the ratio of mutual funds' cash to total assets. During uptrends, fund managers want to invest cash quickly because cash earns only the Rf and thus decreases fund returns. Mutual fund cash positions tend to increase when the market is falling and decrease when the market is rising. 3) new equity issuance (i.e., IPOs) and secondary offerings add to the supply of stocks. Increases in issuance of new shares may often coincide with market peaks.

Yield quoted on a bank discount basis is not representative of the return earned by an investor for the following 3 reasons:

1) BDY annualizes using simple interest and ignores the effects of compound interest 2) BDY is based on the face vale of the bond, not its purchase price - investment returns should be evaluated relative to the amount invested 3) BDY is annualized based on a 360 day year rather than a 365 day year.

4 channels through which a change in the policy rates the monetary authorities control directly are transmitted to prices.

1) Banks' short-term lending rates will increase in line with the increase in the policy rate. The higher rates will decrease AD as consumers reduce credit purchases and businesses cut back on investment in new projects 2) Bond prices, equity prices, and asset prices in general will decrease as the discount rates applied to future expected cash flows are increased. May have a wealth effect bc a decrease in the value of households' assets may increase the savings rate and decrease consumption 3) Both consumers and businesses may decrease their expenditures bc their expectations for future economic growth decrease 4) The increase in interest rates may attract foreign investment in debt securities, leading to an appreciation of the domestic currency relative to foreign currencies. An appreciation of the domestic currency increases the foreign currency prices of exports and can reduce demand for the country's export goods. *taken together, these effects act to decrease aggregate demand and put downward pressure on the price level. A decrease in the policy rate would affect the price level through the same channels, but in the opposite direction

4 combined changes in AD and AS scenarios and effects on price level and real GDP:

1) Both AD and AS increase: real GDP increases but the effect on the price level depends on the relative magnitudes of the changes because their price effects are in opposite directions 2) Both AD and AS decrease: real GDP decreases but the effect of the price level depends on relative mags 3) AD increases and AS decreases: price level will increase but the effect on real GDP depends on relative magnitudes of the changes because their effects on economic output are in opposite directions 4) AD decreases and AS increases: price level will decrease but effect on real GDP depends

4 components of GDP:

1) Consumption: a function of disposable income; where an increase in personal income or a decrease in taxes will increase both consumption and saving. Additional disposable income will be consumed or saved. *The proportion of additional income spent on consumption is called the marginal propensity to consume (MPC) *the proportion saved is the marginal propensity to save (MPS) *MPC + MPS = 100% (always) 2) investment: a function of expected profitability and the cost of financing. Expected profitability depends on the overall level of economic output. *financing costs are reflected in real interest rates (nominal ir - expected inflation rate) 3) government purchases: may be viewed as independent of economic activity to a degree, but tax revenue to the gov't and therefore the fiscal balance, is clearly a function of economic output 4) net exports: are a function of domestic disposable incomes (which affect imports), foreign disposable incomes (which affect exports), and relative prices of goods in foreign and domestic markets

2 types of inflation:

1) Cost-push inflation: results from a decrease in aggregate supply (caused by an increase in the real price of an important factor of production such as wages or energy. -AS decreases increases the price level to P(1), and with no initial change in aggregate demand, reduces output to GDP(1) -wage pressure can be a source of cost-push inflation (sometimes called wage- push inflation when it occurs) -upward pressure on wages is more likely to emerge when cyclical u.e. is low 1) Demand-pull inflation: results from an increase in AD (increase in money supply, government spending, or any other change that increases aggregate demand (shifts to the right)) -AD increases output increases and the price level increases to p1. Real GDP is above potential GDP... but not sustainable. Unemployment falls below natural rate, which puts upward pressure on real wages. Rising real wages result in a decrease in short run aggregate supply until real GDP reverts back to full-employment GDP. Output falls back to GDP* and the price level increases further to P2 -demand pull inflation could persist until the central bank reduced the growth rate of the money supply and allowed the economy to return to full employment equilibrium at a level of real GDP equal to potential GDP -high rates of capacity utilization suggest the economy is producing at or above potential GDP and may experience inflationary pressure *demand-pull effect increases GDP above full-employment GDP, while the cost-push inflation, a decrease in AS initially decreases GDP

2 forms of revenue tools:

1) Direct taxes: are levied on income or wealth. These include income taxes, taxes on income for national insurance, wealth taxes, estate taxes, corporate taxes, capital gains taxes, and Social security taxes. Some progressive taxes (such as income and wealth taxes) generate revenue for wealth and income redistribution 2) Indirect taxes: are levied on goods and services. These include sales taxes, value-added taxes, and excise taxes. Can be used to reduce consumption of some goods and services (alcohol, tobacco, gambling)

2 approaches for addressing how a change in exchange rates affects a country's balance of trade:

1) Elasticities approach- focuses on the impact of exchange rate changes on the total value of imports and on the total value of exports. Bc a trade deficit (surplus) must be offset by a surplus (deficit) in the capital account, we can also view the effects of a change in exchange rates on capital flows rather than on goods flows 2) Absorption approach- focuses on capital flows X-M = (S-I) + (T-G) trade deficit (X-M < 0) means that the right hand side must also be negative so that the total savings (private + gov't savings) is less than domestic investment in physical capital. The additional amount to fund domestic investment must come from foreigners, so there is a surplus in the capital account to offset the deficit in the trade account. -any gov't deficit not funded by an excess of domestic saving over domestic investment is consistent a trade deficit (imports > exports) which is offset by an inflow of foreign capital (a surplus in the capital account)

The business cycle has 4 phases:

1) Expansion: real GDP is increasing -features growth in most sectors of the economy -increasing employment, consumer spending, and business investment -as it approaches peak, rates of increase in spending, investment and employment slow but remain positive, while inflation accelerates -as it approaches its peak, sales growth begins to slow, and unsold inventories accumulate. increase in the inventory to sales ratio above its normal level. -firms respond by reducing production 2) Peak: real GDP stops increasing and begins decreasing 3) Contraction/recession: real GDP is decreasing -associated with declines in most sectors, with inflation typically decreasing. -when the contraction reaches a trough and the economy begins a new expansion or recovery, economic growth becomes positive again and inflation is typically moderate -employment growth may not start to increase until the expansion has taken hold convincingly -when contraction approaches trough, sales begin to accelerate and this causes the inventory-sales ratio to decrease below its normal level -firms respond by increasing output / production 4) Trough: real GDP stops decreasing and begins increasing *needs to be two consecutive quarters of GDP growth in same direction to consider it an expansion/contraction *business cycles recur but not at regular intervals

unemployment can be divided into 3 categories:

1) Frictional unemployment results from the time lag necessary to match employees who seek work with employers needing their skills. 2) Structural unemployment is caused by long-run changes in the economy that eliminate some jobs while generating others for which unemployed workers are not qualified. Structural unemployment differs from frictional unemployment in that the unemployed workers do not currently have the skills needed to perform the jobs available 3) Cyclical unemployment is caused by changes in the general level of economic activity. Cyclical u.e. is positive when the economy is operating at less than full capacity and can be negative when an expansion leads to employment temporarily over the full employment level

Factors that can cause SRAS curve to increase, shift to the right:

1) Labor productivity: holding wage rate constant, an increase in labor productivity will decrease unit costs to producers. Producers will increase output as a result, increasing SRAS 2) Input prices: a decrease in nominal wages or the prices of other important productive inputs will decrease production costs and cause firms to increase production, increasing SRAS. Wages have greatest impact on SRAS 3) Expectations of future output prices: when businesses expect the price of their output to increase in the future, they will expand production, inc SRAS 4) Taxes and government subsidies: either a decrease in business taxes or an increase in gov't subsidies for a product will decrease the costs of production and firms will increase output as a result, inc SRAS 5) Exchange rates: appreciation of a country's currency in the foreign exchange market will decrease the cost of imports. To the extent that productive inputs are purchased from foreign countries, the resulting decrease in production costs will cause firms to increase output, inc SRAS

Five important sources of economic growth:

1) Labor supply: labor force is the number of people over the age of 16 who are either working or available for work but currently unemployed. Affected by population growth, net immigration, and the labor force participation rate. Growth of the labor force is an important source of economic growth 2) Human capital: education and skill level of a country's labor force can be a determinant of economic output as the size of the labor. More human capital = more productive investment in human capital leads to greater economic growth 3) Physical capital stock: a high rate of investment increases a country's stock of physical capital. Increases labor productivity and potential GDP 4) Technology: technology increases productivity and potential GDP 5) Natural resources: resources may be renewable (forests) or non-renewable (coal) countries with large amounts of productive natural resources can achieve greater rates of economic growth

economic indicators can be classified into 3 categories:

1) Leading indicators: change direction before peaks or troughs in the business cycle -avg weekly hrs in manufacturing, consumer expectations, new orders for capital goods 2) coincident indicators: change direction at roughly the same time as peaks or troughs -nonfarm payrolls, real personal income, manufacturing and trade sales 3) lagging indicators: don't tend to change direction until after expansions or contractions are already underway -avg duration of unemployment, inventory to sales ratio, commercial loans, change in consumer price index

The transmission mechanism for a decrease in interbank lending rates affects four things simultaneously:

1) Market rates decrease due to banks adjusting their lending rates for the short and long term 2) Asset prices increase bc lower discount rates are used for computing present values 3) Firms and individuals raise their expectations for economic growth and profitability. They may also expect the central bank to follow up with further interest rate decreases 4) The domestic currency depreciates due to an outflow of foreign money as real interest rates decline 5) *together the 4 factors increase domestic demand as ppl consume more (they have less incentive to save given lower interest rates) and increase net external demand bc depreciation of the domestic currency makes exports increase in overall demand and import prices tends to increase aggregate demand and domestic inflation.

Money has 3 primary functions:

1) Money serves as a medium of exchange or means of payment bc it is accepted as payment for goods and services 2) Money also serves as a unit of account bc prices of all goods and services are expressed in units of money: dollars, yen, rupees, pesos, and so forth. This allows us to determine how much of any good we are foregoing when consuming another 3) Money provides a store of value because money received for work or goods now can be saved to purchase goods later

Three factors cause a laspeyres index of consumer prices to be biased upward as a measure of the cost of living:

1) New goods- older products are often replaced by newer, but initially more expensive products. New goods are periodically added to the market basket and the older goods they replace are reduced in weight in the index 2) Quality changes- if the price of a product increases bc the product has improved, the price increase is not due to inflation but still increases the price index 3) Substitution- even in an inflation-free economy, prices of goods relative to each other change all the time. When 2 goods are substitutes for each other, consumers increase their purchases of the relatively cheaper good and buy less of the relatively more expensive good. Over time could be distortive

actions that violate misrepresentation standard include:

1) Presenting third party research as your own without attribution to the source 2) Guaranteeing a specific return on securities that don't have explicit guarantee from a gov't body or financial institution 3) Selecting a valuation service bc it puts the highest value on untraded security holdings 4) Selecting a performance benchmark that is not comparable to the investment strategy 5) Presenting performance data that isn't wholesome 6) Offering false or misleading info about analyst or firm's capabilities, expertise, or experience 7) Using marketing material from a third party (outside advisor) that are misleading

Indicators can include opinion polls that try to measure investor sentiment directly, as well as several measures that are based on market data:

1) Put/call ratio- put options increase in value when the price of an underlying asset decreases, while call options increase in value if the price of the underlying asset increases. Increase in the put/call ratio indicate a more negative outlook for the price of the asset. Extremely high ratios indicate strongly bearish investor sentiment and possibly an oversold market, while extremely low ratios indicate strongly bullish sentiment and perhaps an overbought market. 2) Volatility index (VIX)- measures the volatility of options on the S&P500 stock index. High levels of the VIX suggest investors fear, volatility or declines in the stock market. 3) Margin debt- the amount of margin debt is a readily available indicator bc brokers are required to report this data. Increases in total margin debt outstanding suggest aggressive buying by bullish margin investors. Increasing margin debt tends to coincide with increasing market prices and vice versa. 4) Short interest ratio - increases in shares sold short indicate strong negative sentiment. Short interest is the number of shares investors have borrowed and sold short.

Future value factor/future value interest factor =

(1+r)^n

Shifts in the SRAS curve

-SRAS curve reflects the relationship bw output and the price level when wages and other input prices are held constant (or are slow to adjust to higher output prices). The curve shows the total lvl of output that businesses are willing to supply at different price levels. *an increase in AS is shown by a shift to the right, as the Q supplied at each P lvl increases

adequate compliance procedures should:

-be clearly written and easy to understand -designate a compliance officer with authority clearly defined -have a system of checks and balances -outline the scope of procedures and what conduct is permitted -contain procedures for reporting violations and sanctions -structure incentives so unethical behavior is not rewarded

article I of the articles of agreement set out the International Monetary Fund's main goals:

-promoting international monetary cooperation -facilitating the expansion and balanced growth of international trade -promoting exchange stability -assisting in the establishment of a multilateral system of payments -making resources available to members experiencing balance of payment difficulties

arguments for trade restrictions that have little support in theory:

-protecting domestic jobs -protecting domestic industries

Justification for spending tools:

-provide services such as national defense that benefit all residents -invest in infrastructure to enhance economic growth -support the country's growth and unemployment targets by directly affecting AD -provide a minimum standard of living -subsidize investment in research and development for certain high-risk ventures consistent with future economic growth or other goals (green technology)

shut down scenarios table

1) If avg revenue < AVC : shut down in short run; *vice versa* short-run shutdown pt 2) If avg revenue < ATC ; shut down in long run. this is the long-run shutdown point 3) If avg revenue = ATC ; firm's breakeven point

fiscal policy tools includes 2 types of tools:

1) spending tools 2) revenue tools

types of international trade agreements, termed trading blocs or regional trading agreements (RTA), in order of their degrees of integration:

1) free trade areas (FTA): all barriers to import and export goods and services among member countries are removed 2) custom union (CU): FTA + all countries adopt a common set of trade restrictions with non-members 3) common market (CM): CU + all barriers to the movement of labor and capital goods among member countries are removed 4) economic union (EU): CM + member countries establish common institutions and economic policy for the union 5) monetary union (MU): EU + member countries adopt a single currency NAFTA = FTA European Union = EU Euro zone = monetary union

price-based indicators:

1) moving average lines 2) bollinger bands 3) oscillators

the BOP (balance of payments) includes:

1) the current account (measures the flows of goods and services) 2) the capital account (consists of capital transfers and the acquisition and disposal of non-produced, nonfinancial assets 3) the financial account (records investment flows)

economists often use a measure called the structural (cyclically adjusted) budget deficit to gauge fiscal policy

This is the deficit that would occur based on current policies if the economy were at full employment

Present value factor, pv interest factor, discount factor =

1/((1+r)^n)

The most basic concept in technical analysis is the trend in prices... a market is said to be in an uptrend / downtrend when prices are?

A market is said to be in an uptrend if prices are consistently reaching higher highs and retracting to higher lows. An uptrend means demand is increasing relative to supply A market is downtrend if prices are consistently declining to lower lows and retracting to lower highs. A downtrend suggests supply (selling pressure) is increasing relative to demand

point = 0.0001 spot rate + points = forward rate ex: foreign exchange rates in percent

AUD/EUR spot rate is quoted at 0.7313 and 120 day forward exchange rate is given as -0.062%. what is 120 day forward AUD/EUR exchange rate? 0.7313 * (1 - 0.00062) = 0.7308

Pure discount instruments such as U.S. T-bills are quoted differently from U.S. government bonds; quoted on a bank discount basis, which is based on the face value of the instrument instead of the purchase price... bank discount yield (BDY) formula

Bank discount yield (BDY) = ((par - purchase price) / par value) * (360/t)

Cross price elasticity of demand

CPED = % change in Qd of good / % change in price of a related good CPED = P0/Q0 * coefficient of independent variable you don't have value for (the one you're changing the price of to see the cross price elasticity)

Sum-of-value-added method

GDP is calculated by summing the additions to value created at each stage of production and distribution

HPY 2 formulas

HPY = ((P1 + CF1)/P0) - 1 or HPY = MMY * (t/360)

Drawing a trendline on a chart can help to identify whether a trend is continuing or reversing. In an uptrend/downtrend, the trendline connects

In an uptrend, the trendline connects the increasing lows in price, whereas in a downtrend, the trendline connects the decreasing highs in price.

rather than estimate elasticity of demand, concentration measures for a market or industry are very often used as an indicator of market power. One concentration measure is the

N-firm concentration ratio, which is calculated as the sum of the percentage market shares of the largest N firms in a market; doesn't directly measure market power or elasticity of demand

underemployed

a person who is employed part time but would prefer to work full time or is employed at a low paying job despite being qualified for a significantly higher-paying one

I/Y(perp.) =

PMT/PV(perp)

PV(annuity due) =

PV(ordinary annuity) * (1+periodic compounding rate)

personal disposable income and formula

Personal disposable income (PDI) is a personal income after taxes. PDI measures the amount that households have available to either save or spend on goods and services and is an important economic indicator of the ability of consumers to spend and save Personal disposable income = personal income - personal taxes

personal income and formula

Personal income is a measure of the pretax income received by households and is one determinant of consumer purchasing power and consumption. Differs from national income in that it includes all income that households receive, including gov't transfer payments such as unemployment or disability benefits, and excludes business taxes and profits that go to the government or business sector rather than directly to households Personal income = national income + transfer payments to households - indirect business taxes - corporate income taxes - undistributed corporate profits

expenditure approach and formula

Under the expenditure approach, GDP is calculated by summing the amounts spent on goods and serviced produced during the period. Termed the value-of-final-output method Expenditure approach: GDP = C + I + G + (X-M)

X - M =

X - M = private savings + government savings - investment

Absolute advantage

a company is said to have this in the production of a good if it can produce the good at a lower resource cost than another country

loyalty

a) in matters related to their employment, members must act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to their employer *put clients interest ahead of firm's *use separate social media accounts for personal and professional communications *don't have compensation systems that encourage unethical behavior *when leaving an employer, members must continue to act in their employer's best interests until their resignation is effective.

professionalism

a) knowledge of the law b) independence and objectivity (dont accept gifts) c) misrepresentation d) misconduct

duties to employers

a) loyalty b) additional compensation arrangements c) responsibilities of supervisors

duties to clients

a) loyalty, prudence, and care b) fair dealing c) suitability d) performance presentation e) preservation of confidentiality

Bar charts

add the high and low prices for each trading period and often include the opening price as well. Each period is displayed as a vertical line

Potential GDP =

aggregate hours worked * labor productivity

The labor force includes

all people who are either employed or unemployed. -ppl who choose not to be in the labor force are said to be voluntarily unemployed and are not included in the calculation of the u.e. rate

To perform relative strength analysis, an analyst calculates the ratios of

an asset's closing prices to benchmark values, such as a stock index or comparable asset, and draws a line chart of the ratios. An increasing trend indicates that the asset is outperforming the benchmark (positive relative strength)

real trend rate (trend rate)

an economy's long-term sustainable real growth rate

Giffen good

an inferior good for which the negative income effect outweighs the positive substitution effect when price falls. (scenario 3^^). Would have an upward-sloping demand curve

Point and figure charts

are helpful in identifying changes in the direction of price movements. These are drawn on graph paper, with price on the vertical axis. The price increment chosen is the "box size" for the chart. Unlike other technical charts, the horizontal axis does not represent discrete units of time. Instead it represents the number of changes in direction. To determine when a change of direction has occurred, the analyst must choose a "reversal size" for the chart. A typical reversal size is three times the box size. Starting from the opening price, the analyst will fill a box in the first column if the closing price has changed by at least one box size. An X indicates an increase of one box size and an O indicates a decrease. If the price changes by more than one box size, the analyst will fill in multiple Xs or Os. If price continues in same direction in the next periods, the analyst will continue filling in the same column. If it changes in the opposite direction by at least the reversal size, the analyst will begin the next column.

Line charts

are the simplest technical analysis charts. They show closing prices for each period as a continuous line

At a support level

buying is expected to emerge that prevents further price decreases.

Hedonic pricing

can be used to adjust a price index for product quality

The primary objective of a central bank is to

control inflation so as to promote price stability. High inflation is not conducive to a stable economic environment.

referral fees: members must

disclose to their employer, clients, and prospective clients, as appropriate, any compensation, consideration, or benefit received from or paid to others for the recommendation of products or services *members should encourage firms to adopt clear procedures for approval and ones regarding the nature and value of referral compensation received.

Perfectly inelastic demand

elasticity = 0. a change in price has no effect on Qd

bond market vigilantes: bond market participants that act in this way

if Ms growth is seen as inflationary, higher expected future asset prices will make long-term bonds relatively less attractive and will increase long-term interest rates

current account (trade) surplus

exports > imports offset by purchases of foreign physical or financial assets

All else equal, PV of an annuity due will be

greater than PV of an ordinary annuity because with an annuity due, there is one less discounting period

Production possibility frontier

illustrates that when a country specializes and increases the production of an export good, increasing costs will increase the opportunity cost of the export good and thus, the PPF shows all combinations of food and machinery that an economy can produce. *slope of the frontier- measures the opportunity cost of machinery in terms of food at each possible combination of food and machinery. *increasingly negative slope if country increases production of machinery, the amount of food production foregone would increase

discretionary fiscal policy and examples for recessions and inflations

implemented through changes in taxes and spending (versus automatic stabilizers). -designed to be expansionary when the economy is operating below full employment. Aims to stabilize AD -recessions: increase gov't spending or decrease taxes -inflations: decrease gov't spending or increase taxes

current account (trade) deficit

imports > exports must be balanced by a net surplus in the capital and financial accounts

M2

includes M1 plus savings accounts, time deposits of under 100k, balances in retail money market mutual funds European central bank has an M3

broad money

includes narrow money plus any amount available in liquid assets, which can be used to make purchases

measures of dispersion

indicate the riskiness of an investment -range -mean absolute deviation -variance

priority of transactions

investment transactions for clients and employers must have priority over investment transactions in which a member is the beneficial owner *client transactions come first *members can avoid conflicts that arise with IPOs by not participating in them *all firms should have procedures in place that address conflicts created by personal investing. The following areas should be covered: -establish limitations on employee participation in equity IPOS -establish restriction on participation in private placements -establish blackout/restricted periods -establish reporting procedures, including duplicate trade confirmations, disclosure of personal holdings and beneficial ownership positions

inflation

is a persistent increase in the price level over time. The prices of almost ALL goods and services are increasing. Erodes the purchasing power of a currency. Favors borrowers at the expense of lenders bc returned principle is worth less in terms of goods in real terms than when it was originally borrowed

disposable income

is equal to income after taxes

Gross domestic product (GDP)

is the total market value of the goods and services produced in a country within a certain time period. Measure's the size of a nation's economy. Only includes purchases of newly produced goods / services. Transfer payments made by gov't not included either. Values used are market values of final goods and services- goods and services that will not be resold or used in the production of other goods and services

preservation of confidentiality: members must keep info about current, former, prospective clients confidential unless:

keep info about current, former, prospective clients confidential unless: (1) info concerns illegal activities on part of client (2) disclosure is required by law (3) client permits disclosure of info

Fractional reserve banking

lending a portion of deposits to earn interest. i.e., a bank holds a proportion of deposits in reserve

disclosure of conflicts: members must

make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with respective duties to their clients, prospective clients, and employer. Members must ensure that such disclosures are prominent, are delivered in plain language, and communicate the relevant information effectively *all potential areas of conflict must be disclosed (disclosure of broker-dealer market-making activities would be included here as well as board service) *most common conflict that requires disclosure is actual ownership of stock in companies that the member recommends or that clients hold *compensation/bonus structure is another common source of conflicts of interest and must be disclosed

Time weighted rate of return and formula

measures compound growth. It is the rate at which $1 compounds over a specified performance horizon. Averaging a set of values over time. The time-weighted rate of return is the preferred method of performance measurement, because it is not affected by the timing of cash inflows and outflows Time weighted rate of return = (((1+r1)*(1+r2))^0.5) - 1 ; where ^0.5 = 1/n

reference to cfa institute, designation, program: when referring to CFA institute, membership, designation, or candidacy in program, members must not

misrepresent or exaggerate the meaning or implications of membership in CFA institute. *can't overpromise individual competence or investment results in the future *CFA marks must always be used either after name or as adjectives, but not as nouns, in written and oral communications. CFA not allowed 4 online usernames

The IS (income-savings) curve portrays the

negative relationship bw real interest rates and real income for equilibrium in the goods market Lower interest rates tend to decrease savings and tend to increase investment to firms bc more investments will have positive NPVs when firms' cost of capital is lower. *a decrease in interest rates decreases (S-I) so that (S-I) < (G-T) + (X-M) income must increase -greater income can restore equilibrium in the goods market by increasing savings (which increases S - I ), increasing tax receipts (which decreases G - T), and increasing imports (which decreases X - M)

When solving for number of payments / number of periods, pmt has to be

negative. --> FV = +

money created formula?

new deposit / reserve requirement

required interest rate on a security =

nominal risk free rate + default risk premium + liquidity risk premium + maturity risk premium

Contrarian strategy

one that buys when most traders are selling and one that sells when most traders are buying.

productivity

output per hour worked ; increases early in expansions but declines early in contractions

PV(perpetuity) =

pmt/r

nominal risk free rate =

real risk free rate + expected inflation rate

US FED

target inflation, max employment and moderate long-term interest rates

Fisher index

the geometric mean of a laspeyres index and a paasche index

money weighted return

the internal rate of return on a portfolio, taking into account all cash inflows and outflows. Money weighted return higher than time weighted if funds are contributed to a portfolio at a favorable time (just prior to a period of relatively high returns)

Monetarist school believes

the variations in AD that cause business cycles are due to variations in the rate of growth of the money supply, likely from inappropriate decisions by the monetary authorities. Suggest that to keep AD stable and growing, the central bank should follow a policy of steady and predictable increases in the money supply

the monetary transmission mechanism refers to

the ways in which a change in monetary policy, specifically the central bank's policy rate, affects the price level and inflation

laspeyres index

uses a constant basket of goods and services... most countries calculate consumer price inflation this way.

Paasche index

uses the current consumption weights (quantity in current period), prices from the base period, and prices in the current period

suitability: unsolicited trade requests

when an investment manager receives a client request to purchase a security that the manger knows is unsuitable, given the client's investment policy statement (IPS). Manager should not make the trade until he has discussed with client the reasons (based on the IPS) that the trade is unsuitable for client's account. After the discussion, portfolio manager may: -execute trade if the effect on the risk/return profile of the client's total portfolio is minimal -if trade has material impact on the risk/return profile of the client's total portfolio: a) update the IPS so the client accept a changed risk profile that would permit the trade. b) if client won't let IPS change, manager may follow firm policy, which may allow the trade to be made in a separate client-directed account. Manager may need to reconsider whether to maintain the relationship with the client

***left off stats session 2

yay stats

Nine major sections of the GIPS standards:

1) Fundamentals of compliance: The fundamental issues involved in complying with GIPS are: a) Definition of the firm b) Documentation of firm policies and procedures with respect to GIPS compliance c) Complying with GIPS updates d) Claiming compliance in the appropriate manner e) Appropriate verification statement when a third-party verifier is employed 2) Input data: should be consistent in order to establish full, fair, and comparable investment performance presentations 3) Calculation methodology: certain methodologies are required for portfolio return calculations and composite return calculations. Uniformity in methods across firms is required so that their results are comparable 4) Composite construction: creation of meaningful, asset-weighted composites is important to achieve a fair presentation. Composite performance is based on the performance of one or more portfolios that have the same investment strategy. Composite returns are the asset-weighted average (not simple average) of the returns on the portfolios that are included in each composite 5) Disclosures: firm must disclose info about presentation and the policies adopted by the firm so that the raw numbers presented in the report are understandable to the user. 6) Presentation and reporting: investment performance must be presented according to GIPS requirements. 7) Real estate: certain provisions apply to all real estate investments regardless of the level of control the firm has over management of the investment. Applies whether asset is producing revenue or there is leverage involved in the investment 8) Private equity: these investments must be valued according to the GIPS private equity valuation principles, unless it is an open-end or evergreen fund (must follow GIPS) 9) Wrap fee/SMA portfolios: separately managed accounts have their own specified requirements that may replace 1-4 sections.

Ethical decision making framework (4 steps):

1) Identify: relevant facts, stakeholders and duties owed, ethical principles, conflicts of interest 2) Consider: situational influences, additional guidance, alternative actions 3) Decide and act 4) Reflect: was the outcome as anticipated? Why or why not?

Factors that increase AD, shifting curve to the right:

1) Increase in consumers' wealth: wealth goes up, savings goes down, spending increases and thus AD goes up (C increases) 2) Business expectations: when businesses are more optimistic about future sales, they tend to increase their investment in plant, equipment, and inventory, which increases aggregate demand (I increases) 3) Consumer expectations of future income: when consumers expect higher future incomes, future savings decreases, while current spending increases and thus increases AD (C increases) 4) High capacity utilization: when companies produce at a high percentage of their capacity, they tend to invest in more plant and equipment, increasing aggregate demand (I increases) 5) Expansionary monetary policy: when the rate of growth of the money supply is increased, banks have more funds to lend, which puts downward pressure on interest rates. Low interest rates increase investment in plant and equipment bc cost of financing these new investments decreases. Lower i.r. and greater availability of credit will also increase consumers' spending on consumer durables that are typically purchased on credit. Thus, the effect of expansionary monetary policy is to increase AD (C and I increase) *if economy is operating at potential GDP (LRAS) when the monetary expansion takes place, the increase in real output will be only for the short run and in the long run, subsequent increases in input prices decrease SRAS and return output to potential GDP 6) expansionary fiscal policy: refers to decreasing gov't budget surplus (or an increasing budget deficit) from decreasing taxes, increasing government expenditures, or both. A decrease in taxes increases disposable income and consumption, while an increase in government spending increases aggregate demand directly (C increases for tax cut, G increases for spending increase) 7) exchange rates: a decrease in the relative value of a country's currency will increase exports and decrease imports increase AD (net X increases) 8) global economic growth: GDP growth in foreign economies tends to increase the quantity of imports (domestic exports) foreigners demand. By increasing domestic export demand, AD increases (net X increases) *change in the opposite direction will tend to decrease aggregate demand

Factors that can cause the LRAS curve to shift:

1) Increase in the supply and quality of labor: an increase in the labor force will increase full employment output and the LRAS. An increase in the skills of the workforce will increase the productivity of a labor force of a given size, increasing potential real output and increasing LRAS 2) Increase in the supply of natural resources: just as with an increase in the labor force, increases in the available amounts of other important productive inputs will increase potential real GDP and LRAS 3) Increase in the stock of physical capital: for a labor force of a given size, an increase in an economy's accumulated stock of capital equipment will increase potential output and LRAS 4) Technology: improvements in technology can increase labor productivity and increase the real outputs that can be produced from a given amount of productive inputs, increasing LRAS. Technology doesn't really retreat so wont shift LRAS down

for a central bank to succeed in its inflation-targeting policies, it should have three essential qualities:

1) Independence: should be free from political interference. Independence can be evaluated based on both operational independence (the central bank is allowed to independently determine the policy rate) and target independence (the central bank also defines how inflation is computed, sets the target inflation level, and determines the horizon over which the target is to be achieved. ECB has both independence types (most just have 1: operational independence) 2) Credibility: To be effective, central banks should follow through on their stated intentions. 3) Transparency: on the part of central banks aids their credibility. Transparency means central banks periodically disclose the state of the economic environment by issuing inflation reports.

Once an inquiry has been made, the professional conduct staff may request an explanation from the subject member or candidate and may: then they may decide to?

1) Interview the subject member or candidate 2) Interview the complainant or third parties 3) Collect documents and records relevant to the investigation and then 1) No disciplinary sanctions are appropriate 2) To issue a cautionary letter 3) To discipline the member or candidate

4 models of oligopoly and implications for price and quantity:

1) Kinked demand curve model: based on the assumption that an increase in a firm's product price will not be followed by its competitors, but a decrease in price will. -each firm believes that it faces a demand curve that is more elastic (flatter) above a given price (the kink in the demand curve) than it is below the given price. the price at which the kink is located is the firm's profit maximizing price. incomplete bc what determines the market price (where the kink is located) is outside the scope of the model 2) Cournot duopoly model: considers a duopoly (only 2 competing firms) and both have identical and constant marginal costs of production. Firms know each others supply and thus the model believes the firms can thus construct a demand curve and marginal revenue curve for its own production and determine the profit maximizing quantity. Early version of strategic games- decision models in which the best choice for a fairm depends on the actions (reactions) of other firms 3) Nash equilibrium model (prisoner's dilemma)- nash equilibrium is reached when the choices of all firms are such that there is no other choice that makes any firm better off (increases profits or decreases losses) collusive agreements to increase price in an oligopoly market will be more successful (have less cheating) when: a) There are fewer firms b) Products are more similar c) Cost structures are more similar d) Purchases are relatively small and frequent e) Retaliation by other firms for cheating is more certain and more severe f) There is less actual or potential competition from firms outside the cartel 4) Stackelberg dominant firm model: in this model, there is a single firm that has a significantly large market share bc of its greater scale and lower cost structure - the dominant firm (DF). Market price is essentially determined by the DF and the other competitive firms (CF) take this market price as given.