Chapter 2: Macroeconomic Analysis Flashcards
What is Fiscal Policy
Fiscal policy involves the use of government spending, taxes and transfer payments such as government subsidies or financial aid to influence the macroeconomic conditions, like aggregate demand, employment, inflation and economic growth.
What us the objective of monetary policy
The main objective of monetary policy is to maintain price stability to ensure sustainable growth.
What is the common monetary policy toolThe typical tool, although not the only one, used by most central banks to implement their monetary policy is interest rates. Interest rates are the costs of borrowing. If interest rate rise, consumers and investors are discouraged from borrowing money to spend and invest.
What is the other monetary policy tool being used
done by managing the exchange rate. If a country’s currency strengthens, prices of imports tend to fall, helping to depress domestic prices. On the other hand, if the country’s currency weakens, imported prices would tend to rise, pushing up domestic price.
What is the impossible trinity
The impossible trinity states that among setting interest rates, managing exchange rates, and allowing for free capital mobility (no capital controls), a country can only sustainably choose 2 out of the 3 policies.
What are the 3 permutations for each country
- Country can choose to set interest rates and not impose capital controls
- this will leave exchange rates to be determined by demand and supply of its currency in the forex market
- Manage exchange rates and do not set capital controls (SG)
- Set interest rate and manage exchange rate
- this will lead to capital controls being imposed
What are some leading economic indicators. What is the purpose?
- Business Sentiment (PMI)
- Consumer confidence
- Housing Stats
Purpose: Predictive
What are some coincident economic indicators. What is the purpose?
- US Non Farm Payrolls
- employment in the non farm sector - Home Sales
- Retail Sales
purpose: Descriptive
What are some lagging economic indicators. What is the purpose?
- GDP Growth
- Inflation Rate
- Unemployment Rate
What is the Fed’s Stance towards interest rate. What is the Fed Funds Target Rate
It appears that more often than not, inflation leads the Fed funds rate, indicating that the Fed is more reactive than proactive.
It is the interest rate that banks charge one another for overnight loans, i.e. the overnight inter-bank rate.
Explain the MAS Policy Tool
The policy tool used by the MAS is the Singapore dollar (“SGD”) nominal effective exchange rate (“S$NEER”).
the $NEER is a trade weighted index constructed by assigning the appropriate trade weights to the SGD bilateral exchange rates with its trading partners
Eg. US - account for 20% of total trade, thus bilateral exchange rate btw SGD and USD will account for 20% of index.
CNY - Accounts for 15% of total trade, thus bilateral exchange rate account for 15%
So how then are interest rates in SG determined
As SG chooses to manage exchange rate and not impose capital controls, Interest rates in Singapore are largely determined by foreign interest rates and the market’s expectation of the strength of the SGD.
SGD relationship with interest rate
If the market believes that SGD is going to appreciate, domestic interest rates would tend to fall, and vice versa. This is because the markets can only allow an investor to be appropriately compensated and not over- compensated. In this case, an investor in SGD is already enjoying a higher return from a stronger SGD and must be willing to settle for a lower interest rate on SGD.
