Basic Economics Questions

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qnygba2010

Economics

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Basic Economics Questions

Please explain as much in detail as possible.

Can the U.S. Treasury yield curve be used to forecast a U.S. economic recession? 

What are some reasons why foreign exchange rates change? 

Is technical analysis of any value in trying to outperform the stock market? 

What are some of the different types of mutual funds? 

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Explanation & Answer

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Can the U.S. Treasury yield curve be used to forecast a U.S. economic recession? 

The slope of the current yield curve suggests that a recession is not likely in the next four quarters. Since November 1995, the interest rate spread between the 10-year Treasury note and the three-month Treasury bill has widened, topping 1 percentage point in March 1996 and remaining above that mark during the past year. According to Estrella and Mishkin, a yield curve with such a slope signifies a recession probability of less than 10 percent. Although the yield curve cannot guarantee good times in the coming year, the track record indicates that no tool offers better clues about the likelihood of coming economic troubles.

What are some reasons why foreign exchange rates change? 

1. Inflation Rates

2. Interest Rates

3. Country’s Current Account / Balance of Payments

4. Government Debt

5. Terms of Trade

6. Political Stability & Performance

7. Recession

8. Speculation

All of these factors determine the foreign exchange rate fluctuations. If you send or receive money frequently, being up-to-date on these factors will help you better evaluate the optimal time for international money transfer. To avoid any potential falls in currency exchange rates, opt for a locked-in exchange rate service, which will guarantee that your currency is exchanged at the same rate despite any factors that influence an unfavorable fluctuation.

Is technical analysis of any value in trying to outperform the stock market? 

As you can tell, trading purely on the basis of technical analysis is a mug's game. However, despite inconsistencies in predictive value, technical analysis may be a useful tool as part of a broader strategy for managing holdings (e.g. to help you time any investments that are decided on other, hopefully fundamentally-focused, criteria).

The fact is that many (misguided) market participants use technical analysis to drive their investment decisions. These collective actions result in tangible changes in asset values, so they need to be understood even by less mis-guided investors. A fundamental investor need not agree that a stock should be moving but it's worth understand why a stock is nevertheless moving.

In particular, one area where technicals may be useful is on the sell-side. We discussed recently William O'Neill's stock selling rules and noted that very few of them involves changes in the fundamentals of a stock. His interesting explanation of this is that many big investors get out of a stock before trouble appears and if the institutional money is selling up in volume, individual investors don't stand much of a chance.

What are some of the different types of mutual funds? 

Type of FundTypical Investment
Equity or Growth FundEquities like stocks
Fixed Income FundFixed income securities like government and corporate bonds
Money Market FundShort-term fixed income securities like treasury bills
Balanced FundA mix of equities and fixed income securities
Sector-specific FundSectors like IT, Pharma, Auto etc.
Index FundEquities or Fixed income securities chosen to replicate a specific Index for example S&P CNX Nifty
Fund of fundsOther mutual funds

Please let me know if you need any clarification. I'm always happy to answer your questions.


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