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CFA Level I - Macroeconomics2
CFA Level I - Macroeconomics2
Unemployment
Frictional Structural Cyclical Considered unemployed if actively searching for work Labor force = employed + unemployed Underemployed Participation ratio = % working age who are employed or seeking employment Discouraged workers
Inflation
CPI basket
PPI , GDP deflator as measures Headline and core inflation (excludes food and energy) Problems with Laspeyres index
> New goods > Quality changes > Substitution
Monetary policy actions that affect quantity of money and credit in an economy in order to influence economic activity
> Expansionary (accomodative) or contractionary (restrictive)
Functions of money
Medium of exchange Unit of account Store of value
Narrow money Notes and coins in circulation, plus checkable bank deposits Broad money narrow money plus money in liquid assets
Fischer effect
Real rates are stable, changes in interest rates are driven by changes in expected inflation
Stability in exchange rates Employment Economic growth Moderate long term rates
Credibility
> Should follow through on their stated intentions
Transparency
> Periodic disclosure about views on inflation, economy etc. > Aids credibility
Transmission mechanism
Suppose economy is in a recession, steps in transmission would be as follows:
Expansionary or contractionary
policy rate > neutral ( contracionary monetary policy) policy rate < neutral ( expansionary monetary policy)
Liquidity trap persistent holding of cash, such that rates dont decrease Cannot stimulate once interest rate reaches zero Quantitative easing may not work if perceived credit risk is high
Fiscal policy
Discretionary Automatic stabilizers
> Unemployment claims, > Taxes
OBJECTIVES
> Influencing economic activity > Redistributing wealth and income > Allocation resources amongst sectors
Revenue tools
Revenue tools
> Direct taxes > Indirect taxes
Fiscal multiplier potential increase in aggregate demand, resulting from an increase in government spending
Difficulties in implementation
Recognition lag Action lag Impact lag
Additional problems
Misreading statistics Crowding out Supply shortages Limits to deficits Multiple targets