Few questions on CFAI L3 econ

  1. for Taylor rule Qs: if they don’t specify that the neutral rate is real or nominal, do we assume it is nominal?

2) I thought inflation increases not decreases during a contraction?

3)In which part of the business cycle does the yield curve steepen? I would think initial recovery and early expansion but that’s not what I’m finding in CFAI Qs unless I’m missing something here…

A few thing -

  • There seems to be a different presentation of the Taylor rule in older exams but the current curriculum makes it clear that it’s a real rate and identified as such so perhaps if it doesn’t explicitly say it’s a real rate than it’s likely nominal consistent with how the cfai goes out of its way to indicate a real rate

  • If the economy is declining then prices are expected to decline so inflation would be coming down

  • Yield curve - I don’t specifically recall at which phase of the business cycle the yield curve changes but as inflation goes up (likely early upswing, inflation goes up so fed steps in to raise rates so the yield curve starts to flatten)

If you’re using Kaplan for prep or if you look at Los 10g of the curriculum, it says that during a contraction, real economic activity is declining and inflation is peaking (so its not coming down)…Although the question says that inflation is coming down. So im just trying to decide which one is right?

CB drops short rates in a contraction so the yield curve steepens.

Inflation is a lagging indicator that rises in good times and declines in bad times. Right around the start of a contraction is when it would have peaked.