Reading 16 Capital Market Expectations (CFA curriculum) Question 14 Part of the solution to this problem reads " …central bank-oriented aspect of Country M’s economy (…) has also improved. Im confused by this in the sense that I thought the increase in the central bank’s money supply is negative to the economic growth simply because an increase points to inflationary pressures and high inflation normally points to a weaker economy. Please elucidate if possible?
The book isn’t right in front of me but CB’s actions to influence the money supply isn’t always negative. IF there is a recession, relaxing policy to grow the money supply lowers interest rates which implies more businesses/consumers can borrow and invest into the economy at cheaper rates.
The opposite is likely true when the economy is in an expansionary phase.
This question is asking for you to use leading indicators to evaluate the state of the economy. So you have to look at what’s going on in the other two indicators (the consumer and the business sector). In this problem, the consumer is showing signs of growth and the business sector is stable, not going up or down much over the months they are showing. Given so, the CB’s action to increase the money supply in this kind of neuteral/slight positive enviornment would be a positive move to continue to improve the economy. Doing so slowly (.12 to .15 to .16), they can get the business sector to grow with more easy cash for investment/business development.
If they said the consumer indicator was going up sky high over the last three months and then the business sector was having double digit month to month growth, then if the CB was increaseing the Money Supply to further fuel the fire, you would expect future inflation and then an economy weakening… but I think that would take longer than the 6-9 months they are asking about here to manifest —unless they gave away cash printing machines to destroy the economy in a few months.
Please pick up the Level II CFAI text (Not Schwesers) and read the EFP and EMP sections and things will be clear automatically.
This is where the difference betn. a third party prep provider stuff and the real stuff is
Thanks Godism17 and Galli (very clear explanations). U too Abal, will check your ref’s if i meet similar conflict.