After examining the recent data on measures of economic activity, the team members make the following comments:
Rajan: Cross-country comparisons of gross domestic product (GDP) should be based on the current market exchange rates because the exchange rate movements correctly reflect the growth in the country’s economy.
Medeva: For equity investing, we need to predict the change in stock market value, and that requires three inputs: expected changes in corporate earnings, GDP, and the price-to-earnings multiple. Of these inputs, the growth rate of GDP must dominate in the long run.
Bergman: From the standpoint of our fixed-income holdings, we should be very concerned if the expected GDP growth rate is less than the potential growth. In that case, there will be an upward pressure on interest rates and a decline in bond prices.
q: is who is most accurate? answer is medeva. this is fine. the justification however sounds weird for why bergman is not correct. “C is incorrect because when the expected GDP growth rate is less than the potential growth, it would put a downward pressure on inflation and a corresponding pressure on interest rates and bond prices”
it should be that b/c we have implemented monetary policies and interest rates are now lower- this will put an upward pressure on bond prices. how can interest rates and bond prices follow the same direction? this is making no sense whatsoever.