AFM Exam 1 Questions & Answers
2023/2024
5 pieces of info we cover - ANSWER-1. ISM
2. Employment Report
3. CPI
4. Industrial Production and Capacity Utilization
5. Measuring Economic Strength
2 main statistics that tell us about the economy - ANSWER-Growth and Inflation
Is growth good? - ANSWER-Yes up to a point. But needs to be sustainable.
Names for negative growth - ANSWER-Recession - 2 quarters of decreasing GDP
Depression - 3 or more years of decline, and exceed 10%
Definitions are not universal - NBER defines them in hindsight
Negative growth contradictions - ANSWER-There are some positives:
1. Permits some companies to get rid of payrolls they wanted to - cleansing
2. Permits reallocation from old failing industries to new growing ones
How do we measure inflation? - ANSWER-CPI - basket
12 days of Christmas
can be any basket of goods
What kind of inflation is bad? - ANSWER-Unexpected inflation
,What is bad for the economy is not _______, it is the..... - ANSWER-how much
volatility of inflation
Why is volatility of inflation bad? - ANSWER-It makes it hard to plan for long-term growth (think WACC
estimates) and hurts the economy. High volatility means less risk tolerance and less investment in the
economy.
2 key questions - ANSWER-1. Is growth sustainable?
2. Is inflation stable?
Typically, growth and inflation are... - ANSWER-correlated
Explain why growth and inflation are correlated - ANSWER-Let's say a factory needs more labor, energy,
and raw materials to meet new demand. If raw materials are in low supply, we pay more for the raw
materials. Growing and paying more. With growth, the prices of constrained resources go up. So, growth
and inflation are usually correlated.
When can you have more growth without inflation? - ANSWER-When you have improved efficiencies.
Stagflation and example - ANSWER-Inflation with little or no growth. Example: oil shock of 1970s. Usually
something wrong to create stagflation (it's not an increase in demand, its a decrease in supply)
Why don't we just drive inflation to zero? - ANSWER-Phillips curve - unemployment goes up as we push
inflation down.
What did St Louis Fed say is the single most important statistic in the world? - ANSWER-Adjusted
monetary base
Explain the stages of fed expanding its BS during the financial crisis - ANSWER-Bought bonds, mortgages,
etc.
QE1: 800-1600
QE2: 1600-2800
, QE3: 2400-4500
This is important. The fed has $4.5T of assets on its BS
What is the question now after the stimulus? - ANSWER-The fed flooded America with money. The
question is: how is the fed going to get all these assets off of its balance sheet? How are they going to
take the money back?
This is the single most important issue right now: they are draining the bunch bowl.
How is the fed winding down its balance sheet? - ANSWER-Not by selling. As principal is repaid, they are
not reinvesting it - they are pulling money out of the economy
How much was the fed unloading every month? - ANSWER-$50B
Monetary Base vs S&P 500 Chart - ANSWER-Starting in 08 they move directly together. Until 2016 when
Trump was elected - the monetary base started flattening and decreasing a little, while the market kept
going up
Before Trump, the fed's money moved the stock market. Trump was a new driver for the market.
How long is the lag between what the fed does and the stock market reaction? - ANSWER-6 months
What will happen if the S&P goes back to being driven only by monetary policy - ANSWER-Big losses
Why shouldn't we declare a success over the crisis yet? - ANSWER-We don't know what will happen as a
result of getting $3.5T off the books
Credit Default Swaps - ANSWER-A measure of risk - insurance policy against the default of a government
security
2023/2024
5 pieces of info we cover - ANSWER-1. ISM
2. Employment Report
3. CPI
4. Industrial Production and Capacity Utilization
5. Measuring Economic Strength
2 main statistics that tell us about the economy - ANSWER-Growth and Inflation
Is growth good? - ANSWER-Yes up to a point. But needs to be sustainable.
Names for negative growth - ANSWER-Recession - 2 quarters of decreasing GDP
Depression - 3 or more years of decline, and exceed 10%
Definitions are not universal - NBER defines them in hindsight
Negative growth contradictions - ANSWER-There are some positives:
1. Permits some companies to get rid of payrolls they wanted to - cleansing
2. Permits reallocation from old failing industries to new growing ones
How do we measure inflation? - ANSWER-CPI - basket
12 days of Christmas
can be any basket of goods
What kind of inflation is bad? - ANSWER-Unexpected inflation
,What is bad for the economy is not _______, it is the..... - ANSWER-how much
volatility of inflation
Why is volatility of inflation bad? - ANSWER-It makes it hard to plan for long-term growth (think WACC
estimates) and hurts the economy. High volatility means less risk tolerance and less investment in the
economy.
2 key questions - ANSWER-1. Is growth sustainable?
2. Is inflation stable?
Typically, growth and inflation are... - ANSWER-correlated
Explain why growth and inflation are correlated - ANSWER-Let's say a factory needs more labor, energy,
and raw materials to meet new demand. If raw materials are in low supply, we pay more for the raw
materials. Growing and paying more. With growth, the prices of constrained resources go up. So, growth
and inflation are usually correlated.
When can you have more growth without inflation? - ANSWER-When you have improved efficiencies.
Stagflation and example - ANSWER-Inflation with little or no growth. Example: oil shock of 1970s. Usually
something wrong to create stagflation (it's not an increase in demand, its a decrease in supply)
Why don't we just drive inflation to zero? - ANSWER-Phillips curve - unemployment goes up as we push
inflation down.
What did St Louis Fed say is the single most important statistic in the world? - ANSWER-Adjusted
monetary base
Explain the stages of fed expanding its BS during the financial crisis - ANSWER-Bought bonds, mortgages,
etc.
QE1: 800-1600
QE2: 1600-2800
, QE3: 2400-4500
This is important. The fed has $4.5T of assets on its BS
What is the question now after the stimulus? - ANSWER-The fed flooded America with money. The
question is: how is the fed going to get all these assets off of its balance sheet? How are they going to
take the money back?
This is the single most important issue right now: they are draining the bunch bowl.
How is the fed winding down its balance sheet? - ANSWER-Not by selling. As principal is repaid, they are
not reinvesting it - they are pulling money out of the economy
How much was the fed unloading every month? - ANSWER-$50B
Monetary Base vs S&P 500 Chart - ANSWER-Starting in 08 they move directly together. Until 2016 when
Trump was elected - the monetary base started flattening and decreasing a little, while the market kept
going up
Before Trump, the fed's money moved the stock market. Trump was a new driver for the market.
How long is the lag between what the fed does and the stock market reaction? - ANSWER-6 months
What will happen if the S&P goes back to being driven only by monetary policy - ANSWER-Big losses
Why shouldn't we declare a success over the crisis yet? - ANSWER-We don't know what will happen as a
result of getting $3.5T off the books
Credit Default Swaps - ANSWER-A measure of risk - insurance policy against the default of a government
security
