Chapter 7: Monetary System, Monetary and Fiscal Policy

In this section

• Money, Central Banks, and the Money Supply
  A deep dive into the nature of money, its evolution, the workings of central banks, and how money is created and managed in modern economies.
• Demand for Money and the Equation of Exchange
  Explore why households and firms hold money, learn about Keynesian vs. Monetarist views on money demand, and master the classic Equation of Exchange (MV=PQ).
• Inflation Targeting and Other Monetary Policy Regimes
  Explore key monetary policy frameworks including inflation targeting, exchange rate targeting, monetary targeting, and nominal GDP targeting, examining their goals, benefits, and challenges.
• Automatic Stabilizers and the Role of Government Debt
  Explore how automatic stabilizers function, how they differ from discretionary fiscal policy, and the dynamic role of government debt in macroeconomic stabilization.
• Implementation Lags in Monetary and Fiscal Policy
  Dive into the critical concept of policy lags—recognition, decision, implementation, and effectiveness—and examine the nuanced timing challenges that confront monetary and fiscal authorities, along with key portfolio management considerations for CFA candidates.
• Monetary Policy Tools and Transmission Mechanisms
  Discover how central banks use open market operations, policy rates, reserve requirements, and forward guidance to shape financial conditions, influence aggregate demand, and manage inflation.
• Fiscal Policy Tools (Government Spending, Taxation, Budgets)
  Explore government spending categories, taxation policies, budget formation, and their macroeconomic impacts. Understand deficits, surpluses, the multiplier effect, and how fiscal policy influences both economies and capital markets.
• Fiscal Multipliers
  Explore the fundamentals and advanced nuances of fiscal multipliers, including spending and tax multipliers, the role of marginal propensity to consume, policy credibility, and their impact on national income.
• Interactions between Monetary and Fiscal Policy
  Explore coordinated monetary and fiscal policy, policy conflicts, the policy trilemma, and how independence of central banks shapes price stability and economic growth.
• Monetary Policy Strategy (Exchange Rate vs. Inflation Targeting)
  A deep exploration of exchange rate targeting and inflation targeting, analyzing the benefits, drawbacks, and practical considerations of differing monetary policy regimes.
• Central Bank Independence and Credibility
  Explore how central banks maintain independence and credibility, why it matters for inflation control, and how governance structures enhance public trust.
• Unconventional Monetary Policies (Quantitative Easing)
  A comprehensive exploration of how central banks employ unconventional monetary tools, such as quantitative easing and credit easing, to stabilize markets and influence long-term yields when policy rates approach zero.
• Zero Lower Bound Constraints and Negative Interest Rates
  Explore how central banks handle the Zero Lower Bound (ZLB), implement Negative Interest Rate Policies (NIRP), and the potential effects on financial markets and stability. This section includes real-world examples, practical insights, and tips for CFA Level I exam readiness.
• Supply‐Side Economics and the Laffer Curve
  Explore the core principles of supply-side economics, the intriguing shape of the Laffer Curve, and how tax rates can influence economic behavior, fiscal outcomes, and asset valuations.