CFA Level I Microeconomics and Macroeconomics (Part II)

By Stella Goh – Market Data Analyst | 11 July 2019

As discussed earlier in my previous Article of “CFA Level I Microeconomics and Macroeconomics (Part I)”, I believe that all of you have a better understanding on what reading 14 to reading 17 are regarding about in this topic. Today, I would like to continue to talk about what content we can learn from reading 18 until reading 20 on the topic of Microeconomics and Macroeconomics.

Reading 18 Monetary and Fiscal Policy

In this reading, candidates can learn on the comparison between monetary policy versus fiscal policy and the ways to determine whether the monetary policy is expansionary or contractionary. Monetary policy is an action consists with the process of drafting, announcing, and implementing the plans which taken by the central bank, currency board, or other competent authority of a country to control the quantity of money supply and interest rate in the economy. There are three objectives of monetary policies such as controlling inflation, reduce unemployment, and to promote moderate long-term interest rates.

Fiscal policy is generally focused on the estimation of taxation and government spending, which will influence the economic conditions such as demand for goods and services, employment, inflation and economic growth. The objective of fiscal policy is to create a healthy economic of growth. Both the monetary and fiscal policies are used to accelerate growth when an economy starts to slow down, moderate growth or inflation is stable and low.

Besides, in this reading, candidates can also have a better understanding on the functions of money, creation process of money, theories of demand and supply of money, tools used to implement monetary policy, monetary transmission mechanism, Fisher effects, differences between the use of inflation, interest rates, and exchange rates, limitation of monetary policy and so on. A summary and practice problems will conclude the readings.

Reading 19 Internal Trade and Capital Flows

In this reading, candidates can have a better understanding of the framework of analysing the patterns and trends in the international trade, capital flows and their economic implications. International trade is referring to the financial transactions which used to exchange the products and services between foreign countries across the international borders. It allows firms to compete in the global market and employ competitive pricing in their products and services. When there are more and more products available in the market, consumers will meet their needs and satisfy their wants. As a result, the national economy will grow as the exchange of goods and services such as imports or exports are increasing. Thus, the balances of international payments will increase, and it can be a potent driver for sustained GDP growth and improve the standard living in a country.

Besides, from this reading, candidates are also able to know what are the advantages of trading blocs, conventional markets, economic unions, and even able to understand what decisions made by the consumers, firms and governments that can affect the balance of payments. However, the most exciting thing in this topic is candidates can learn on such as how to distinguish between the absolute and comparative advantages, gross domestic product versus gross national product, types of trades, capital restrictions, Richardian and Hecksher-Ohlin Models of trade, objectives of capital restrictions imposed by the government. Moreover, the functions and purposes of international organisations that facilitate trade, which including the World Bank, the International Monetary Fund, and World Trade Organization are also discussed in this reading together with some examples provided.

Reading 20 Currency Exchange Rates

In the last reading of this topic, you can see there are more discussions on the basic concept and terminology of the exchange rates. Candidates are also able to know who the major players are, how they conduct their business, and how they respond to the changes in exchange rates. Exchange rates represent the price of one currency in terms of another currency, which will be used all over the international market. Additionally, these rates can either be floating or fixed. Floating exchange rates are decided by the mechanism of the market demand and supply, whereas the central banks of a country decide the fixed exchange rates. The most crucial thing in this reading are candidates have to take note that the convention used in various foreign markets around the world because they can vary widely. Sometimes, the exchange rates quoted in term of the domestic currency, but sometimes they will be quoted oppositely.

Besides, candidates are also able to learn on such as what are the differences between nominal rates versus real exchange rates, spot rates versus forward exchange rates, forward discount versus forward premium, currency cross rate, functions and participants in the foreign market. Last but not least, the exchange rate regimes, forward quotations expressed on point basis or in percentage terms into outright forward quotation, effects of exchange rates on countries’ international trade and capital flows, the arbitrage relationship between spot rates, forward rates and interest rates will be discussed in this reading together with some of the examples provided in the textbook.


In conclusion, candidates must be able to demonstrate the knowledge of microeconomics and macroeconomic principles. In Part II, we can see that the session begins with the discussion on the function of monetary and fiscal policy used by central banks and governments. After that, international trade and capital flows have been discussed together with the relationship between the different types of flows and the advantages of trade to trade partners. At the end of the session, it concludes with an overview of currency market fundamental and the foreign exchange risk in the operations and investment in the global market. It is important that the candidates must be familiar with the material covered in this topic since this topic carry a quite higher percentage of marks in the exam.

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