Cfa Level 2 - Economics

Front 1

Cross rates with bid-ask spreads

Back 1

(A/C)bid = (A/B)bid * (B/C)bid

(A/C)offer = (A/B)offer * (B/C)offer

Front 2

Currency arbitrage

Back 2

up the bid and down the ask

Front 3

Value of fwd currency contract prior to expiration

Back 3

((FPt - FP)*(contract size)) / (1 + Ra*(days/360))

Front 4

Covered interest rate parity

Back 4

F = ((1+Ra*(days/360))*S0) / (1+Rb*(days/360))

Front 5

Uncovered interest rate parity

Back 5

E(percentage change in spot) = Ra - Rb

difference in interest rates

Front 6

Fisher relation

Back 6

Rnominal = Rreal + E(inflation)

Front 7

International Fisher relation

Back 7

RnominalA - RnominalB = E(inflationA) - E(inflationB)

Front 8

Relative PPP

Back 8

% change in spot (A/B) = inflationA - inflationB

High inflation rates lead to currency depreciation

Front 9

real exchange rate

Back 9

St * (CPIb/CPIa)

Front 10

Taylor Rule

Back 10

Prescribed central bank policy rate = neutral real policy rate + current inflation rate + alpha*(current inflation rate - target inflation rate) + beta*(log of current level of output - log of potential level of output)

r policy = rn + pi + alpha*(pi - pi*) + beta*(y-y*)

Front 11

Profit on FX carry trade

Back 11

interest differential - change in the spot rate of investment currency

Front 12

Mundell-Fleming model

Back 12

Impact of monetary and fiscal policies on interest rates and exchange rates.

High capital mobility

expansionary monetary/restrictive fiscal = ccy depreciation because of low interest rates

Low capital mobility

expansionary monetary/expansionary fiscal = ccy depreciation bc of current account deficits

Front 13

Dornbusch overshooting model

Back 13

restrictive monetary policy leads to short term appreciation of currency then a slop depreciation to PPP value

Front 14

Labor productivity

Back 14

output per worker = T(K/L)^alpha

Front 15

Growth accounting

Back 15

growth rate in potential GDP

=long term growth rate of technology

+ alpha*(long term g of capital)

+ (1-alpha)*(long term g of labor)

or

=long term growth rate of labor force _ long term growth rate in labor productivity

Front 16

Classical growth theory

Back 16

Real GDP/person reverts to subsistence level

Front 17

Neoclassical growth theory

Back 17

Sustainable growth rate is a function of population growth, labor's share of income, and the rate of technological advancement

Growth rate in labor productivity is driven only by technological improvement

Assumes diminishing returns to capital

G* = tech/(labor's share of income) + change in Labor force

Front 18

Endogenous growth theory

Back 18

Investments in capital have constant returns

increase in savings rate leads to a permanent increase in growth rate

R&D expenditures increase technological progress

Front 19

Classifications of regulations

Back 19

Statutes - made by legislative bodies

Administrative Regulation - made by gov't

Judicial law - findings of the court

Front 20

Regulatory capture theory

Back 20

regulatory body will eventually be influenced or controlled by the industry being regulated

Front 21

Regulatory arbitrage

Back 21

exploiting regulatory differences between jurisdictions

Front 22

Tools of regulatory intervention

Back 22

price mechanisms, restricting or requiring certain activities, and provision of public goods or financing of private projects

Front 23

Net regulatory burden

Back 23

Costs to the regulated entities minus the private benefits of regulation

Front 24

Sunset clause

Back 24

require a cost benefit analysis to be revisited before the regulation is renewed