quick q: If government spending is higher in one country than another, is this better for the company? I am refering to EOC q 10 where USA has higher government spending but for the current advantage it says Europe is better. dont understand this. thanks for your inputs.
My understanding is higher government spending is bad for private companies, because governments absorb capital and leave little for private companies, thus increasing cost of capital. This is called “crowding out”, a level 2 concept. If I am wrong, please correct me, so I can learn too. thx.
i think it goes back to what they say the preconditions for growth are: 1) sound fiscal policy 2) minimal public intrusion on private sector 3) infrastructure and human capital investment (evidently in a non-meddlesome fashion from the public sector?!) 4) competition 5) sound tax policy
As cookthebooks mentioned “sound fiscal policy” is needed but as jinstudy correctly pointed out the governments borrowing due to fiscal defict is “crowding out” private sector
can you explain me the effect of GDP growth, central money suplly and government spending relative to tax receipts on a fixed income portfolio? i dont understand why GDP grwoth is negative for bond investors in taht such economic growth and aggregate demand would put upward pressure on bond yields. (WHY UPWARD PRESSURE ON YIELD)… I understand how afterwards price sinks, but why upward pressure on yield when gtp is growing? and when money supply extended, is this not usually with lower interest rates and price of bond would fall? i know it says that it is expected that higer demand and grwoth would again lead to higher yields… so why is there an upward pressure on yields when economy is doing well?
i think you are overthinking this and falling into the trap of trying to apply real world knowledge to these simplified cfa examples. if the cfai says things are black and white believe them. for my thinking higher gdp growth, higher interest rates due to higher inflation premiums baked in, with higher inflation generally being bad for bonds, and central banks raising rates to try and control inflation and keep the economy from overheating.
===economic growth and aggregate demand would put upward pressure on bond yields. (WHY UPWARD PRESSURE ON YIELD)=== My understanding is simple, when GDP is good, companies and stocks are good, everybody wants something double or triple the return, who will want bond at that time anyway? Investors lift up their “required rate of return”, which is yield, right? so the existing bond portfolio may shrink.
great, thanks!
lol i find the CFAI to be very anti keynesian in the their economic wirtings …they subscribe to the chicago friedman monetarist theory all taxes are bad gov spending is bad deregulation is great
yup, i approach these exams from the perspective of what would joe kernen or larry kudlow think and it helps me channel the proper reaganite mindset.
cookthebooks Wrote: ------------------------------------------------------- > yup, i approach these exams from the perspective > of what would joe kernen or larry kudlow think and > it helps me channel the proper reaganite mindset. there u go cookthebooks …kudlow no no no dont increase taxes ( roll back tax breaks ) on large oil companies …ur killing the economy killing jobs, forcing the company to invest elsewhere and stiflinggrowth i am disappointed that the cfai reading have nary a mention on the recent financial turmoil i guess when we get the charter?
and the government involvement in the economy is the root of all evil, except in china where they are kicking our butt thanks to errr umm the public sector briliiantly controlling everything. the cognitive dissonance is truly remarkable.