3. Macro

Question 1

Why do we care about macro analysis?

Answer 1

80% of variation in stock prices are influenced by macro factors

Question 2

What are some macroeconomic indicators?

Answer 2

GDP, unemployment rate, inflation rate, interest rate, budget deficit, etc.

Question 3

What is inflation rate?

Answer 3

The rate of increase in prices over a given period of time

Question 4

Why is high inflation bad?

Answer 4

• Your currency has low power

- Uncertainty about the future

Question 5

Why is low inflation (deflation) bad?

Answer 5

• Delayed consumption of durable goods

- Real debt goes up (1M today is 0.8M tomorrow -> you have to pay more for your debt)

Question 6

Describe fiscal policy. Pros & cons?

Answer 6

• Taxes, government spending, subsidies, etc.
• Difficult to implement (government has to decide)
• Once approved - effective immediately

Question 7

Describe monetary policy. Pros & cons?

Answer 7

• Controlled by the Central Bank. Has to do with raising and dropping interest rate.
• Pros: easy to implement (Central Bank/Fed has a small committee. Jay Powell)
• Cons: lagging effect
• Interest rate is influenced through: (1) open market operations or (2) quantitative easing

Question 8

What is open market operations?

Answer 8

• Monetary policy tool
• The FED or Central Bank buys and sells government bonds
• Influence Federal funds rate

Question 9

What is quantitative easing?

Answer 9

• Monetary policy tool
• Similar to open market operations but 3 main differences: (1) massive amount: $120B/month (2) pre-announced (scheduled) (3) long term + corporate bonds (not just short term gov. bonds)