In a previous article, we introduced the CFA Institute
Investment Foundation Program (Read
more here). It is a free program
designed for anyone who wants to enter or advance within the investment
management industry, including IT, operations, accounting, administration, and
marketing. Candidates who successfully
pass the online exam earn the CFA Institute Investment Foundations Certificate.
There are total of 20 Chapters in 7 modules, covering all
the essential topics in finance, economics, ethics and regulations. This series of articles will highlight the
core knowledge of each chapter.
Chapter 5 provides an overview of macroeconomics. The
learning outcome of chapter 5 is as follows:
·
Describe why macroeconomic considerations are
important to an investment firm and how macroeconomic information may be used;
·
Define gross domestic product (GDP) and GDP per
capita;
·
Identify basic components of GDP;
·
Describe economic growth and factors that affect
it;
·
Describe phases of a business cycle and their characteristics;
·
Explain the global nature of business cycles;
·
Describe economic indicators and their uses and
limitations;
·
Define inflation, deflation, stagflation, and
hyperinflation, and describe how inflation affects consumers, businesses, and
investments;
·
Describe and compare monetary and fiscal policy;
·
Explain limitations of monetary policy and
fiscal policy.
Economic indicators—measures of economic activity—are
regularly reported and analysed. These measures may be leading, lagging, or
coincident indicators.
Inflation is a general rise in the prices of products and
services. Measures of inflation include consumer price indices, producer price
indices, and implicit GDP deflators.
Changes in price levels can affect economic growth because
consumers, companies, and governments may change the timing of their purchases,
the amount of their spending, and their saving and spending decisions based on
anticipated changes in prices.
Three additional price level changes investors also consider
are deflation, stagflation, and hyperinflation.
Economic growth, inflation, and unemployment are major
concerns of central banks and governments. They each use different financial
tools to affect economic activity. Central banks, which are often independent
from governments, use monetary policy. Governments use fiscal policy.
Monetary policy refers to central bank activities that are
directed toward influencing the money supply and credit in an economy. Its goal
is to influence output, price stability, and employment.
Fiscal policy involves the use of government spending and
tax policies to influence the level of aggregate demand in an economy and thus
the level of economic activity.
Both fiscal and monetary policies have limitations: they are
affected by time lags and the responses to and consequences of each may not be
as expected.
Sample Question:
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