Students will be required to forecast the values of the 7 variables listed below. The forecast is to cover the time period until December 13, 2011, the day of the final exam. The report should be no longer than two pages (single spaces), with a short paragraph written about each variable. Except for the growth rate (see #7 below), the forecast needs to specify either “increase” or “decrease” for each variable; “no change” is an unacceptable answer (I want you to “go out on a limb”; no “fence riding” permitted). The rationale given for the forecast is what is important is to state why they are going to rise.
The variables in the forecast are:
2. 10 Year Treasury Note yield (Long term interest rate)
3. Dollar. State whether the $ will appreciate or depreciate relative to the Euro
4. Inflation rate (measured by CPI)
5. Trade Deficit
6. Federal Budget Deficit
7. GDP growth rate. If the forecast is positive growth rate – not a recession – then specify whether “slow” (1-2%), “moderate” (3-4%), or “strong” (4% and above); if forecast is recession then state recession.
Factors which should be considered in forecasting variables – to be used only as a guide; other factors can and should be considered.
1. DJIA. Earnings and interest rates and any developments which may affect these (for e.g. MP, FP, ERP, value $; policies in other countries (capital flows); exp. of inflation.
2. 10 Year Treasury bond yield. (this is an interest rate) – inflationary expectations; MP; FP; business cycle (demand for funds by corporation); value$.
3. E/$ rate. MP and FP in US vs EU in terms of effects on interest rates and hence capital flows; trade deficit in US vs EU; business cycle in US vs EU; protectionism.
4. Inflation. How close to Yn is economy? MP and FP; value of $; trend in productivity supply shocks; protectionism.
5. Trade Deficit. Value of $; business cycle in US vs trading partners; inflation in US vs trading partners; federal budget deficit.
6. Federal Budget Deficit. Political factors (including intent of President and Congress); business cycle impact on taxes and spending; domestic and/or international crises (terrorism, homeland security, war).
7. GDP growth rate. MP and FP; oil “shocks”; business cycle overseas; trade war (protectionism); stock market; consumer confidence index; business investment; $; trade deficit; AD.
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