Thursday, October 31, 2013

Monetary Policy, the Neutral Interest Rate, and Seething Hatred

I straight up hate Economics.

As I cycle through all the topics on the CFA level one exam, I nearly decided to skip over the entire Economics chapter.

If, like me, you never took an Economics class in your life, there are more terms and concepts per potential exam question question than any other topic on the test. At just 10% of the exam there are 100 learning outcome statements. Each LOS contains an average of 97 new terms, that are used in twelve new concepts and associations (personal estimate) that are never expanded upon in further readings.

The most frustrating thing about the Economics readings is that I scored above 50% on the practice questions without exposing myself to the material. In fact I found the readings so tedious that that's how I've approached the entire topic, practice questions first. If I can't understand the answer, then back to the readings. I'm now averaging over 70% on Economics practice tests. I've been back to the readings exactly zero times.

So with that said here are 0.0023% of the required terms and concepts (another personal estimate) in the CFA Level 1 Economics readings:

Monetary Policy and the Neutral Interest Rate

The neutral interest rate is the trend rate of real economic growth plus the target inflation rate, or:

Neutral interest rate = trend rate of economic growth + target inflation rate

Monetary policy is considered:

Expansionary if the neutral interest rate > the policy rate

Contractionary if the neutral interest rate < the policy rate

I'm going to go buy a bottle of high quality whiskey, then beat myself over the head with it until the seething, soul consuming hatred I'm feeling for Economics subsides.

Happy Halloween!