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Macro Economic Variable & Stock Return

4247 words - 17 pages

INTRODUCTION

Macroeconomic Variables

Macroeconomics is a branch of economics dealing with the performance, structure, behaviour, and decision-making of an economy as a whole, rather than individual markets. This includes national, regional, and global economies.

Macroeconomic is a factor that is pertinent to a broad economy at the regional or national level and affects a large population rather than a few select individuals. Macroeconomic factors are key indicators of economic performance and are closely monitored by governments, businesses and consumers.

Macroeconomic factors are the factors which affect the wider economy. In other words these factors seem to summarize the picture of ...view middle of the document...

The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. Changes in CPI are used to assess price changes associated with the cost of living.

CPI is one of the most frequently used statistics for identifying periods of inflation or deflation. This is because large rises in CPI during a short period of time typically denote periods of inflation and large drops in CPI during a short period of time usually mark periods of deflation.
• Money supply
The money supply or money stock is the total amount of monetary assets available in an economy at a specific time. Money supply data are recorded and published, usually by the government or the central bank of the country. Public and private sector analysts have long monitored changes in money supply because of its possible effects on the price level, inflation, the exchange rate and the business cycle.
The RBI defines the monetary aggregates as:
1. Reserve Money (M0): Currency in circulation + Bankers’ deposits with the RBI + ‘Other’ deposits with the RBI.
2. M1: Currency with the public + Deposit money of the public (Demand deposits with the banking system + ‘Other’ deposits with the RBI).
3. M2: M1 + Savings deposits with Post office savings banks.
4. M3: M1+ Time deposits with the banking system.
5. M4: M3 + All deposits with post office savings banks (excluding National Savings Certificates).
Broad Money is a measure of the money supply that includes more than just physical money such as currency and coins (also termed narrow money). Components of broad money are still very liquid, and non-cash components can usually be converted into cash very easily.
The most commonly used measure of broad money is M3, which includes currency and coins, and deposits in checking accounts, savings accounts and small time deposits, overnight repos at commercial banks, and non-institutional money market accounts. This is the main measure of the money supply, and is the economic indicator usually used to assess the amount of liquidity in the economy, as it is relatively easy to track
• Prime Lending Rate
Prime rate or prime lending rate is a term applied in many countries to a reference interest rate used by banks. The term originally indicated the rate of interest at which banks lent to favoured customers, i.e., those with good credit, though this is no longer always the case. Some variable interest rates may be expressed as a percentage above or below prime rate.

It is the interest rate that commercial banks charge to their most credit-worthy customers. Generally a bank's best customers consist of large corporations. The prime interest rate, or prime lending rate, is largely determined by the federal funds rate, which is the overnight rate which banks lend to one another. The prime rate is also important for retail customers, as the prime rate directly affects the lending rates which are...

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