Reading 23: Capital Market Expectations－LOS j trends, interpret, economic, capital, growth

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CFA Institute Area 6: Economics
Session 6: Economic Concepts for Asset Valuation in Portfolio Management
Reading 23: Capital Market Expectations
LOS j: Identify and interpret the components of economic growth trends and demonstrate the application of economic growth trend analysis to the formulation of capital market expectations.

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Which of the following is NOT a governmental structural policy that would promote the long-term growth in an economy?

A) A promotion of competition.

B) Responsible fiscal policy.

C) Minimal government interference in the economy.

D) A redistributive tax system.

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Answer and Explanation

When wealth is redistributed through the governments tax policy, economic inefficiency is created. Tax policies should promote economic growth as much as possible.

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Which of the following is NOT a substantial component of the change in the long-term growth rate in an economy?

A) Changes in employment levels.

B) Changes in consumer spending.

C) Changes in spending on new capital inputs.

D) Changes in total factor productivity growth.

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Answer and Explanation

Although consumer spending is the largest component of GDP, it is fairly stable over time. To forecast a countrys long-term economic growth trend, the trend growth rate can be decomposed into two main components: changes in employment levels and changes in productivity. The former component can be further broken down into population growth and the rate of labor force participation. The productivity component can be broken down into spending on new capital inputs and total factor productivity growth.

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If population growth is expected to grow by 3%, labor force participation is expected to grow by 0.25%, spending on new capital inputs is projected to grow at 2.75% and total factor productivity will grow by 0.75%. What is the long-term projected growth rate?

A) 6.00%.

B) 6.75%.

C) 7.00%.

D) 5.75%.

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Answer and Explanation

The sum of the components is 3% + 0.25% + 2.75% + 0.75% = 6.75%, so the economy is projected to grow by this amount.

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