I just came across an econ ? on the sample exam that stated higher econonomic growth should lead to currency appreciation. To back that, the CFAI book says it’s because the nation’s higher growt should attract more international equity capital, leading to currency appreciation. However, Schweser says increased income leads to higher demand for imports, leading to depreciation. I’d think higher economic growth and higher income would go hand in hand. Schweser doesn’t even seem to mention econ g (at least in Secret sauce). The CFAI text however then goes on to mention that there is an opposite effect in that higher growth leads to higher demand for imports, leading to a possible depreciation, but that the cumulative effect is uncertain. So what’s the deal? I guess on the test if it specifically says higher econ g, pick appreciate, and higher income g, pick depreciate? The text doesn’t even mention income growth that I see.
I think it was a pm question there is the theory of money flow(vs the traditional) that says that as economy increases outside investors want to be a part of it. that means increased demand for currency and appreciation
ng30 Wrote: ------------------------------------------------------- > I just came across an econ ? on the sample exam > that stated higher econonomic growth should lead > to currency appreciation. To back that, the CFAI > book says it’s because the nation’s higher growt > should attract more international equity capital, > leading to currency appreciation. > > However, Schweser says increased income leads to > higher demand for imports, leading to > depreciation. I’d think higher economic growth > and higher income would go hand in hand. Schweser > doesn’t even seem to mention econ g (at least in > Secret sauce). > > The CFAI text however then goes on to mention that > there is an opposite effect in that higher growth > leads to higher demand for imports, leading to a > possible depreciation, but that the cumulative > effect is uncertain. > > So what’s the deal? I guess on the test if it > specifically says higher econ g, pick appreciate, > and higher income g, pick depreciate? The text > doesn’t even mention income growth that I see. I missed this question with the exact same reasoning.
did the q mention anything about traditional/money demand theory?
flor, i do recall that, but the answer specifically referred to pages 556-7 of the econ text, “Factors that cause a nation’s currency to appreciate or depr.”
no, nor did the answer
here it is, schweser officially contradicting the curriculum in a qbank answer: The other statements would most likely lead to currency depreciation (or demand for foreign currency). A current account deficit means that a country imports more than it exports. As a result, there is increased demand for foreign currency. An unanticipated shift to expansionary monetary policy would lead to currency depreciation. The expansionary policy leads to higher economic growth, an accelerated inflation rate (increased demand for foreign goods), and lower real interest rates (the country’s assets are less attractive to foreigners). All these factors cause a nation’s currency to depreciate.
Wow. I would love to see the reaction of ANY currency trader if you gave him/her that explanation. They’d laugh at you and take your money. Simple relationship in the real world: lower rates–> growth–>increased demand for LC–>appreciating currency