Chartered Financial Analyst (CFA) Practice Exam Level 2

Which of the following is NOT a property of countries with high future expected growth?

1. High Real Risk Free Rates

2. High Savings Rate

3. Low Inter-temporal rate of substitution

4. Low Savings Rate

The correct answer is: High Savings Rate

Countries with high future expected growth tend to exhibit certain economic characteristics. One crucial aspect is the relationship between savings and investment. A high savings rate is typically associated with high expected growth because savings provide the funds necessary for investment in capital goods, which ultimately drives economic growth. High real risk-free rates, while not universally indicative of growth, can reflect investor confidence and robust economic conditions, allowing for greater capital accumulation as financial markets stabilize, thus contributing indirectly to growth potential. Conversely, a low inter-temporal rate of substitution generally indicates that individuals prefer to consume sooner rather than later, which can correlate with a lower propensity to save and potentially diminish future investments. When considering the options, a low savings rate stands out as inconsistent with the notion of high expected growth. Countries with low savings rates might struggle to finance investments required for future growth, as insufficient savings can lead to limited resources available for capital formation. Therefore, highlighting savings behaviors is essential in this context; inadequate savings detracts from investment capabilities and ultimately growth prospects. In essence, the selection recognizes that a high savings rate is a fundamental driver for sustaining high future expected growth, reinforcing the interconnectedness of these economic properties.