Economics and Investment Markets

CFA Level II Portfolio Management
#1

There is a question in schweser that I need help on,

  1. Which of the following statements is most accurate? Higher expected GDP growth would: A. lower the utility of future consumption and reduce the inter-temporal rate of substitution. B. increase the utility of future consumption and reduce the inter-temporal rate of substitution. C. lower the utility of future consumption and increase the inter-temporal rate of substitution. A higher GDP growth rate would mean higher incomes in the future. Due to the principle of diminishing marginal utility, the utility of future consumption would, therefore, be lower. Lower future utility relative to the utility of current consumption lowers the inter-temporal rate of substitution.

My question is regarding the explanation of the answer, since higher GDP result in higher income, does not that mean that there will be more consumption in the future as there will be more spending?

#2

Yup, that’s why the IRS lowers when GDP growths. If GDP growths (in fact, not just expectations), then the consumption is also meant to growth (obviously).

Where is exactly your doubt?

#3

Higher expected GDP --> less need to save for the future --> preference for present consumption rises --> u0 rises and u1 falls --> M falls. Rf rate = [1/M] -1 As M falls, Rf rises.

#4

Thanks, but I think you did not get my question. However, your answer in another link helped me out!

https://www.analystforum.com/forums/cfa-forums/cfa-level-ii-forum/91349903#comment-91815093

#5

Thanks, but I think you did not get my question. However, your answer in another link helped me out!

https://www.analystforum.com/forums/cfa-forums/cfa-level-ii-forum/91349903#comment-91815093

#6

Thanks, this is really helpful!

#7

Just a suggestion. Understand it conceptually rather than mathematically. It will ease your mind.

#8

Nice!