PM: Economics and Investment Markets

Intertemportal rate of substitution formula

m~_t,s = Margnial utility of consumption (s) periods in the future / Marginal utility of consumption today (t)

When would a central bank cut rates?

When GDP growth or inflation is too low

When would a central bank raise rates?

When GDP growth or inflation is too high

What does a positive output gap imply?

Economy is producing beyond its sustainbale capacity?

What does a negative output gap imply?

Economy is producing below its sustainable capacity

What is a positive output gap usually associated with?

High inflation

What is a negative output gap usually associated with?

High unemployment

What is the Taylor rule designed to do?

Inform policymakers of an appropriate policy rate

What is another way of thinking about policy rate?

It is the neutral policy rate, neither bolsters nor slows real economic growth

When inflation > targeted level, is policy rate < or > neutral rate?

Policy rate > neutral rate

When inflation < targeted level, is policy rate < or > neutral rate?

Policy rate < neutral rate

When output gap is positive, should policy rate be > or < neutral rate?

Policy rate should be > neutral rate

When output gap is negative, should policy rate be > or < neutral rate?

Policy rate should be < neutral rate

Prudent monetary policy for central banks does what to short-term interest rates during expansions?

Raises short-term interest rates during expansions

Prudent monetary policy for central banks does what to short-term interest rates during recessions?

Cuts short-term interest rates during expansions

When do flat and high yield curves result?

During latter stages of expansions

When do flat and low yield curves result?

During recessions

What does a flattening yield curve usually indicate?

A weakening economy and potentially a recession

What does an inverted yield curve indicate?

A strong sign of a forthcoming recession

What does a steepening yield curve reflect?

Increases in expected growth rates

What is a credit spread?

Difference between yields of a corporate bond and a same-maturity, default-free government bond is called the credit spread

Why is Commercial Real Estate (CRE) a unique asset class?

Can be viewed as part equity and part bond, and it is usually illiquid