# Macroeconomics Course Guide: [Your programme, term or study group] > A course guide for the MBA core macroeconomics and global economy course: GDP and growth, inflation, unemployment, > monetary and fiscal policy, interest rates and central banks, exchange rates, the balance of payments, business > cycles, and how managers read macro data and turn it into decisions. It gives a 12-session roadmap, a key-concepts > table linked to the concept cards, an original mini-case on Northfield Outdoor Co. facing an interest-rate and > currency shock (with a teaching note), assignment rubrics, an exam plan and a self-test. It is for MBA students in > the core year, admitted students who finished the pre-MBA economics primer, and managers who want a structured > refresher. Source basis: Keynes (1936), Solow (1956), Phillips (1958), Okun (1962), Mundell (1963), Fleming (1962), > Friedman (1968), Taylor (1993), the central-bank strategy statements and the international statistical standards > named in the text, written up in original words with fictional examples. Replace every [bracketed] value and every > row marked *Example*. This is a learning aid, not investment, hedging or policy advice. ## Document control | Field | Value | |---|---| | Learner | [Your name] | | Programme, course code and term | [Programme name, course code, term YYYY] | | Instructor and teaching assistant | [Names] | | Learning team | [Team name or number] | | Home economy I will track | [Example: United States / euro area / my home country] | | Data sources I follow | [Example: national statistics office GDP and CPI releases, central-bank policy statements] | | Reviewed by | [Learning team member, mentor or coach] | | Version | [0.1] | | Last updated | YYYY-MM-DD | ## Contents - What the course is for - Prerequisites - Session roadmap - Key concepts and formulas - Dated facts: central banks and statistical standards - How managers read macro data - Mini-case: Northfield Outdoor Co. and the double shock - Typical assignments and how they are graded - Exam preparation plan - Common struggles - Reading list - Self-test questions - My notes and next steps - Sources and further reading - Answer key - Teaching note: Northfield Outdoor Co. - Revision history - Standard and licence note ## What the course is for Microeconomics explains how firms and consumers make choices; macroeconomics explains the environment in which they make them: aggregate demand, inflation, interest rates, exchange rates and the business cycle. Managers do not set interest rates, but they set prices, inventories, hiring plans, capital budgets and hedging policies that succeed or fail depending on that environment. The core macro course trains you to read the economy as a set of linked variables, to understand how central banks and governments react, and to translate a macro scenario into the numbers on a company's income statement and balance sheet. Competencies the course builds, mapped to the competency list used across this library (AACSB-style learning goals): | Competency | What it looks like in this course | |---|---| | Analytical and quantitative reasoning | Compute real growth, real rates, a Taylor-rule benchmark and the P&L effect of a currency move | | Global perspective | Read exchange rates, capital flows and the balance of payments; compare central-bank frameworks | | Communication | Write a one-page macro briefing for a leadership team with a clear "so what" | | Ethical decision making | Treat forecasts honestly: state uncertainty, avoid presenting scenarios as predictions | | Leadership and teamwork | Build and defend a team scenario plan in a case discussion | | Technology, data and AI | Pull official data series, chart them, and check AI-generated summaries against the source release | ## Prerequisites | Prerequisite | Where to get it | Ready? | |---|---|---| | Supply and demand, elasticity, opportunity cost | mba/pre-mba-economics-primer sections 1 to 4 | [Yes / not yet] | | GDP, inflation, interest and exchange-rate basics | mba/pre-mba-economics-primer sections 6 to 9 | [Yes / not yet] | | Percent changes, compounding, logs, index numbers | mba/pre-mba-quant-refresher | [Yes / not yet] | | Spreadsheet charts and growth formulas | mba/pre-mba-excel-modeling-drills | [Yes / not yet] | | Income statement and cash flow basics | mba/pre-mba-accounting-primer | [Yes / not yet] | | Discounting and the time value of money | mba/pre-mba-finance-primer | [Yes / not yet] | ## Session roadmap | Session | Topic | Card or template to read | Case or exercise | Deliverable | |---|---|---|---|---| | 1 | Why macro matters to managers; the circular flow | This guide, mba/pre-mba-economics-primer | Read last quarter's GDP release for your home economy | One paragraph: what grew and what shrank | | 2 | Measuring output: GDP, real versus nominal, growth accounting | mba/mba-macro-indicators-card | Compute real growth from nominal GDP and the deflator | Spreadsheet with three years of real growth | | 3 | Long-run growth: capital, labour, productivity (Solow 1956) | mba/mba-macro-indicators-card | Compare two economies' growth paths | Half-page growth comparison | | 4 | Inflation: CPI, PCE, core, expectations | mba/mba-macro-indicators-card | Decompose a CPI release into goods, services and energy | Inflation dashboard | | 5 | Unemployment and the labour market; Phillips curve and Okun's law | mba/mba-macro-indicators-card | Estimate Okun's law from 10 years of data (academic/stats-linear-regression) | Regression output and interpretation | | 6 | Money, interest rates and central banks; the Taylor rule | mba/mba-capm-wacc-card (rates in the discount rate) | Compute a Taylor-rule benchmark against the actual policy rate | One-page memo: is policy tight or loose? | | 7 | Monetary transmission: from policy rate to firms and households | This guide (transmission diagram) | Map the channels for one industry | Transmission map for your industry | | 8 | Fiscal policy: multipliers, deficits, debt sustainability | This guide | Evaluate a fictional stimulus package | Short note with multiplier range | | 9 | Business cycles, recessions and leading indicators | mba/mba-macro-indicators-card | Build a leading-indicator dashboard | Dashboard with three leading indicators | | 10 | Exchange rates: PPP, interest parity, real exchange rate | mba/mba-fx-interest-parity-card | Compute a forward rate and a real exchange-rate change | Calculation sheet | | 11 | Balance of payments, capital flows, open-economy policy (Mundell 1963; Fleming 1962) | This guide, mba/mba-fx-interest-parity-card | Read a current-account release | Half-page note on external balance | | 12 | Managers and macro shocks: scenarios, hedging, pricing | This guide, finance/fx-interest-rate-hedging-policy | Northfield Outdoor Co. mini-case | Case write-up (mba/mba-case-write-up) | | 13 | Global economy and crises: financial stability, emerging markets | mba/mba-global-immersion-plan | Team debate on a country risk scenario | Team scenario plan | | 14 | Review and exam practice | mba/mba-exam-prep, mba/mba-formula-sheet | Past-style problems (your course's own) | Error log entries (mba/mba-error-log) | ## Key concepts and formulas | Concept | Formula or definition | *Example* and Excel | Card | |---|---|---|---| | GDP (expenditure approach) | $Y = C + I + G + (X - M)$ | 14,000 + 3,600 + 3,800 + 2,500 - 3,100 = 20,800 (bn); `=SUM(B2:B5)-B6` | mba/mba-macro-indicators-card | | Real growth | $g_{real} = \frac{1 + g_{nominal}}{1 + \pi_{deflator}} - 1$ | Nominal 5.6 percent, deflator 3.1 percent: 2.42 percent; `=(1+5.6%)/(1+3.1%)-1` | mba/mba-macro-indicators-card | | Inflation | $\pi_t = \frac{CPI_t}{CPI_{t-1}} - 1$ | See self-test question 4 | mba/mba-macro-indicators-card | | Unemployment rate | Unemployed divided by labour force | See self-test question 6 | mba/mba-macro-indicators-card | | Fisher relation (Fisher 1930) | $1 + i = (1 + r)(1 + \pi^{e})$ | Nominal 4.5 percent, expected inflation 3.0 percent: real 1.456 percent (shortcut 1.5); `=(1+4.5%)/(1+3%)-1` | mba/mba-capm-wacc-card | | Taylor rule (Taylor 1993) | $i = \pi + 0.5(\pi - \pi^{*}) + 0.5\,\tilde{y} + r^{*}$ | $\pi = 3.4$, $\pi^{*} = 2$, gap $-0.5$, $r^{*} = 2$: 5.85 percent; `=B1+0.5*(B1-2)+0.5*B2+2` | This guide | | Okun's law (Okun 1962) | $\Delta u \approx -\beta\,(g - g^{*})$ | $\beta = 0.5$, growth 1.1 percent against trend 2.0: unemployment up about 0.45 points; `=-0.5*(1.1-2)` | This guide | | Simple spending multiplier (Keynes 1936) | $\frac{1}{1 - MPC}$ | MPC 0.75: multiplier 4 (an upper bound; real multipliers are much smaller) | This guide | | Phillips curve (Phillips 1958; Friedman 1968) | Short-run trade-off between unemployment and inflation, shifting with expectations | Expectations-augmented: no lasting trade-off in the long run | This guide | | Purchasing power parity (Cassel 1918) | $\%\Delta S \approx \pi_{home} - \pi_{foreign}$ (relative PPP) | A long-run anchor, poor at short horizons | mba/mba-fx-interest-parity-card | | Covered interest parity | $F = S\,\frac{1 + i_{home}}{1 + i_{foreign}}$ | Forward points from the rate differential | mba/mba-fx-interest-parity-card | | Balance of payments | Current account + capital account + financial account + errors = 0 | A current-account deficit is financed by net financial inflows | This guide | | Business cycle | Expansion, peak, contraction, trough (Burns and Mitchell 1946) | See the dated facts section for how recessions are dated | mba/mba-macro-indicators-card | **Monetary transmission.** The central bank sets a short-term policy rate; the effect reaches firms through several channels with long and variable lags. ```mermaid flowchart LR P["Central bank changes policy rate"] --> M["Money-market and short-term rates"] M --> L["Bank lending rates and credit conditions"] M --> Y["Bond yields and expectations of future rates"] M --> F["Exchange rate (higher rates attract capital)"] Y --> A["Asset prices: equities, housing, collateral values"] L --> D["Household and business spending and investment"] A --> D F --> N["Net exports and import prices"] D --> AD["Aggregate demand"] N --> AD AD --> O["Output and employment"] O --> I["Inflation"] N --> I ``` ## Dated facts: central banks and statistical standards - **US Federal Reserve.** As of October 2026, the Federal Open Market Committee's Statement on Longer-Run Goals and Monetary Policy Strategy (adopted 2012, amended effective 22 August 2025 after the 2025 framework review, and reaffirmed effective 27 January 2026) states a longer-run inflation goal of 2 percent measured by the annual change in the price index for personal consumption expenditures (PCE), says maximum employment is not directly measurable and has no fixed numerical goal, and commits to a public review roughly every five years. Check federalreserve.gov. - **European Central Bank.** As of October 2026, the ECB's strategy assessment concluded on 30 June 2025 confirmed a symmetric 2 percent inflation target over the medium term, measured with the Harmonised Index of Consumer Prices (HICP). Check ecb.europa.eu. - **Bank of England.** As of October 2026, the inflation target of 2 percent on the Consumer Prices Index is set by the government in the remit to the Monetary Policy Committee. Check bankofengland.co.uk. - **Business-cycle dating in the United States.** The National Bureau of Economic Research's Business Cycle Dating Committee dates US peaks and troughs. It defines a recession as a significant decline in economic activity spread across the economy and lasting more than a few months, judged on depth, diffusion and duration together; it is not the "two negative quarters of GDP" rule (the 2001 recession did not have two consecutive negative quarters). Check nber.org. - **Statistical standards.** The United Nations Statistical Commission adopted the System of National Accounts 2025 (SNA 2025) on 5 March 2025, and the IMF released the seventh edition of the Balance of Payments and International Investment Position Manual (BPM7) on 20 March 2025; countries are encouraged to implement both over the following years (the IMF names a target window around 2029 to 2030). Expect revisions and new treatments (for example of digital and data assets) in official series as countries switch. Check unstats.un.org and imf.org. Policy rates, inflation and growth figures change every month: never hard-code them into an assignment; cite the release and its date. ## How managers read macro data Managers do not need to forecast the economy better than professional forecasters; they need to know which macro variables drive their business, how sensitive the business is to each, and what they will do if a variable moves. 1. **Map exposures first.** Which lines of the P&L move with consumer spending, with interest rates, with each foreign currency, with commodity prices? Write the sensitivity (for example "EBIT falls USD 1m for each 1 percent EUR appreciation"). 2. **Read the release, not the headline.** Look at revisions, components (goods versus services inflation, core versus headline) and the trend over three to six months. 3. **Separate level, change and surprise.** Markets react to the difference between the release and expectations; your business reacts to the level and trend. 4. **Know the release calendar.** GDP is quarterly and revised; CPI and labour data are monthly; central banks publish meeting dates in advance. 5. **Watch market-implied expectations.** Yield curves and forward exchange rates show what markets already price in; a plan built on a different view is a bet that should be named as such. 6. **Think in scenarios, not point forecasts.** Build a base case and two or three alternatives with triggers and pre-agreed actions. 7. **Check AI summaries against the source.** Generated summaries of data releases can misstate a number or a date; open the official release before you use a figure. | Indicator | Frequency | Why it matters to my business | My sensitivity | Trigger and action | |---|---|---|---|---| | *Example:* Real consumer spending | Monthly | Discretionary outdoor purchases | 1 percent fall reduces volume about 1.5 percent | Two weak months: cut open-to-buy by 5 percent | | *Example:* Policy rate and 2-year yield | Per meeting, daily | Floating-rate revolver cost | 100 bp raises interest by USD 1.2m | Yield above plan by 50 bp: review swap | | *Example:* EUR per USD | Daily | Technical fabrics bought in EUR | 1 percent EUR rise costs USD 1.0m unhedged | Rolling hedge per policy | | [Indicator] | [Frequency] | [Exposure] | [Sensitivity] | [Trigger and action] | | [Indicator] | [Frequency] | [Exposure] | [Sensitivity] | [Trigger and action] | ## Mini-case: Northfield Outdoor Co. and the double shock ### Situation It was the first Monday of the new quarter when Dana Okafor, chief financial officer of Northfield Outdoor Co., asked the treasury and merchandising leads into her office with a single page of charts. Northfield, a mid-size outdoor-gear retailer and brand with 140 stores and a growing e-commerce business, reports in US dollars. It had closed its fiscal year with revenue of USD 480m, of which USD 86.4m came from its Canadian stores and website, and operating profit (EBIT) of USD 70.4m. The board had approved a plan that assumed a steady economy and stable currencies. Neither assumption had survived the summer. Inflation in Northfield's home market had re-accelerated, driven by services and shipping costs, and the central bank had raised its policy rate by a cumulative 150 basis points over two meetings, signalling that it would hold rates high "for as long as needed". Bond yields had followed. At the same time the euro had strengthened by 10 percent against the dollar, after the euro-area central bank had kept its own rates unchanged and capital had flowed into euro assets on better growth news. The Canadian dollar had moved the other way, losing 6 percent of its value in US dollars as commodity prices fell. For Northfield these moves hit in three places. About 40 percent of its cost of goods, mostly technical fabrics, insulated outerwear and mountaineering boots, is bought from European mills and priced in euros. Treasury policy requires hedging half of the next twelve months' forecast euro purchases with forward contracts, so half of the exposure is protected for now and half is not. Canadian revenue translates into fewer dollars, partly offset by Canadian operating costs in Canadian dollars. And the company's USD 120m revolving credit facility pays a floating rate, the reference rate plus 1.75 percent; the USD 80m term loan is fixed at 5.5 percent. Merchandising lead Priya Raman was more worried about customers than about currencies. Footfall in the past six weeks was down, and the company's consumer survey showed shoppers trading down to private-label basics. Her team estimated that US unit volume for the coming year would be about 3 percent lower than plan if the slowdown continued. She wanted to protect volume with promotions; treasury lead Mateo Lindqvist wanted to protect margin with price increases on euro-sourced lines and to extend the euro hedges while the forward points were still favourable. Okafor had to take a recommendation to the board in three weeks. She asked the team to quantify the combined effect of the shocks on next year's EBIT and pre-tax profit, to check the effect on the company's interest coverage and its leverage covenant (net debt to EBITDA no higher than 3.0 times), and to propose a response that would hold up under two different macro scenarios: rates staying high for a year, or a recession that brought rate cuts within six months. "I do not want a forecast," she said. "I want to know what we do in each world, and what we decide now so we are not improvising later." ### Exhibit 1: Northfield baseline plan (USD m, fiscal year, fictional) | Line | Value | |---|---| | Revenue, US | 393.6 | | Revenue, Canada (CAD 117.5m at 1.36 CAD per USD) | 86.4 | | Total revenue | 480.0 | | Cost of goods sold (52 percent of revenue) | 249.6 | | of which priced in EUR (40 percent of COGS; EUR 90.76m at 1.10 USD per EUR) | 99.84 | | Operating expenses (of which USD 20.0m incurred in CAD by the Canadian business) | 160.0 | | EBIT | 70.4 | | Depreciation and amortisation | 25.0 | | EBITDA | 95.4 | | Interest: revolver USD 120m at 6.00 percent (reference 4.25 + 1.75) | 7.2 | | Interest: term loan USD 80m fixed at 5.50 percent | 4.4 | | Profit before tax | 58.8 | | Tax at 25 percent | 14.7 | | Net income | 44.1 | | Cash | 30.0 | | Net debt (200.0 debt less 30.0 cash) | 170.0 | ### Exhibit 2: Macro dashboard, home economy and currencies (fictional) | Indicator | Last year average | Latest | |---|---|---| | Real GDP growth, annualised | 2.4 percent | 1.1 percent | | Headline consumer price inflation, year on year | 2.6 percent | 3.4 percent | | Core inflation, year on year | 2.9 percent | 3.3 percent | | Unemployment rate | 4.0 percent | 4.5 percent | | Policy rate (reference rate) | 4.25 percent | 5.75 percent | | 10-year government bond yield | 4.1 percent | 4.6 percent | | USD per EUR | 1.1000 | 1.2100 | | USD per CAD (CAD per USD) | 0.7353 (1.3600) | 0.6912 (1.4468) | | Consumer confidence index (long-run average 100) | 102 | 94 | ### Exhibit 3: Treasury and debt profile (fictional) | Item | Detail | |---|---| | Revolving credit facility | USD 120m drawn, floating: reference rate plus 1.75 percent, resets monthly, matures in 3 years | | Term loan | USD 80m, fixed 5.50 percent, matures in 5 years | | Covenant | Net debt to EBITDA no higher than 3.0 times, tested quarterly | | FX policy | Hedge 50 percent of forecast EUR purchases for the next 12 months with forwards; no hedging of Canadian profit translation | | Interest-rate policy | No swaps in place; board approval needed to fix more than 50 percent of floating debt | ### Discussion questions 1. Which of the three shocks (euro, Canadian dollar, US demand) hurts next year's EBIT most, and by how much? What is the combined effect on EBIT and on pre-tax profit once the rate rise is included? 2. What happens to interest coverage (EBIT divided by interest) and to the net debt to EBITDA covenant? How much headroom is left? 3. How much of the euro shock does the 50 percent hedge remove, and what does it not protect against? 4. Mateo proposes raising prices on euro-sourced lines just enough to offset the hedged euro cost increase. Compute the price rise and test it with a price elasticity of -1.5 for those lines. Is it a good idea? 5. Using the transmission diagram, explain how the same central-bank decision affects Northfield through demand, financing cost and the exchange rate. Why did the euro rise against the dollar? 6. Draft the decision rules Northfield should adopt now for the two scenarios Dana Okafor named (rates high for a year; recession and rate cuts within six months). ## Typical assignments and how they are graded Typical assignments in the core macro course: a **macro briefing memo** (one or two pages on what the latest data mean for a company or industry); **problem sets** on national accounts, inflation, policy rules and exchange rates; a **case write-up** on a company facing a macro shock (use mba/mba-case-write-up); a **team presentation** on a country or region; and a **final exam** mixing calculations and short essays. Check your syllabus for weights. | Criterion | Excellent (4) | Proficient (3) | Developing (2) | Weight | |---|---|---|---|---| | Use of data | Official sources, dated, components and revisions considered | Correct data, limited context | Headline numbers only, undated | 20 percent | | Economic reasoning | Correct mechanism, links variables through the transmission channels | Mostly correct, one link missing | Correlation presented as cause | 25 percent | | Quantification | Business impact computed with formulas shown and sensitivities | Impact computed, no sensitivities | Qualitative only | 25 percent | | Recommendation | Clear actions, triggers, scenarios, owners | Actions without triggers | Description without recommendation | 20 percent | | Communication | One-page summary first, charts labelled, no jargon | Clear but long | Hard to follow | 10 percent | ## Exam preparation plan | Week before exam | Focus | Activities | Output | |---|---|---|---| | 3 | Concepts | Define every row of the key-concepts table from memory; redo the self-test in this guide | List of weak concepts | | 3 | Calculations | Real growth, Fisher, Taylor rule, Okun, CPI inflation, forward rates: ten problems mixed | Error log entries in mba/mba-error-log | | 2 | Mechanisms | Draw the transmission map, the balance-of-payments identity and the cycle phases without notes | One-page summary sheet | | 2 | Cases | Re-solve the Northfield mini-case in 60 minutes; compare with the teaching note | Timed write-up | | 1 | Past-style problems | Your course's own practice exams under time pressure | Score and miss list | | 1 | Current data | Re-read the latest policy statement and inflation release for your home economy | Five bullet "macro now" note | | Day before | Light review | Formula sheet (mba/mba-formula-sheet), sleep | Nothing new | ## Common struggles 1. **Real versus nominal.** Always ask which one a number is. Dividing growth rates (or using the shortcut subtraction) inconsistently causes most calculation errors. 2. **Stocks versus flows.** GDP and deficits are flows per period; debt and the capital stock are stocks at a date. 3. **Levels versus changes.** A falling inflation rate means prices are still rising, only more slowly. 4. **Direction of exchange-rate quotes.** "USD per EUR" and "EUR per USD" move in opposite directions. Write the unit every time. 5. **Policy rate versus the rates firms pay.** Firms borrow at spreads over reference rates and at longer maturities; long yields can move differently from the policy rate. 6. **Correlation versus causation in macro data.** Many variables move together over the cycle; identify the mechanism before you claim a cause. 7. **Overconfidence in forecasts.** Professional forecasters miss turning points; plan for scenarios. 8. **Treating identities as theories.** $Y = C + I + G + NX$ is an accounting identity; it says nothing by itself about what causes what. ## Reading list Classic works (for context and to cite the originator): - Keynes (1936), *The General Theory of Employment, Interest and Money*: aggregate demand and the multiplier. - Solow (1956), on the contribution to the theory of economic growth: the neoclassical growth model. - Phillips (1958), on unemployment and money wage rates in the United Kingdom: the original Phillips curve. - Okun (1962), on potential GNP: the output-unemployment relation. - Fleming (1962) and Mundell (1963): policy in an open economy with capital mobility. - Friedman (1968), on the role of monetary policy: expectations and the natural rate. - Kydland and Prescott (1977), on rules rather than discretion: time inconsistency and central-bank credibility. - Taylor (1993), on discretion versus policy rules in practice: the Taylor rule. Textbooks (further reading, any recent edition): Mankiw, *Macroeconomics*; Blanchard, *Macroeconomics*; Krugman, Obstfeld and Melitz, *International Economics*. Open resource: OpenStax, *Principles of Macroeconomics* (3rd edition, CC BY-NC-SA 4.0), openstax.org. ## Self-test questions 1. An economy has consumption 9,000, investment 2,500, government purchases 2,700, exports 1,800 and imports 2,000. What is GDP? 2. Nominal GDP grows 7.1 percent and the GDP deflator rises 4.5 percent. What is real growth (exact formula)? 3. Inflation is 5.0 percent, the target is 2 percent, the output gap is +1.0 percent and the neutral real rate is 2 percent. What policy rate does the Taylor (1993) rule suggest? 4. The CPI rises from 302.5 to 314.2 over a year. What is the inflation rate? 5. A bank pays 6.0 percent nominal and expected inflation is 3.5 percent. What is the exact expected real rate? 6. The labour force is 168.0 million and 8.4 million people are unemployed. What is the unemployment rate? 7. Why is "two consecutive quarters of falling real GDP" not the official definition of a US recession? 8. A country runs a current-account deficit. What must be true of its financial account (ignoring errors and the capital account)? 9. Explain in three steps how a rise in the home policy rate could strengthen the home currency. 10. In the Northfield mini-case, why does the 50 percent euro hedge protect this year's profit but not next year's competitiveness? ## My notes and next steps | Item | My note | |---|---| | Concepts I could not define on day one | [List] | | Five indicators I now follow for my industry | [List with source] | | My answer to the Northfield case in one sentence | [One line] | | Self-test score and misses logged | [x / 10, logged in mba/mba-error-log on YYYY-MM-DD] | | Next guide or card | [mba/mba-fx-interest-parity-card / mba/mba-corporate-finance-guide] | ## Sources and further reading Primary works: - Burns, A. F., and Mitchell, W. C. (1946). *Measuring Business Cycles*. National Bureau of Economic Research. - Cassel, G. (1918). Abnormal deviations in international exchanges. *The Economic Journal*, 28(112), 413-415. - Fisher, I. (1930). *The Theory of Interest*. Macmillan. - Fleming, J. M. (1962). Domestic financial policies under fixed and under floating exchange rates. *IMF Staff Papers*, 9(3), 369-380. - Friedman, M. (1968). The role of monetary policy. *The American Economic Review*, 58(1), 1-17. - Keynes, J. M. (1936). *The General Theory of Employment, Interest and Money*. Macmillan. - Kydland, F. E., and Prescott, E. C. (1977). Rules rather than discretion: the inconsistency of optimal plans. *Journal of Political Economy*, 85(3), 473-491. - Mundell, R. A. (1963). Capital mobility and stabilization policy under fixed and flexible exchange rates. *The Canadian Journal of Economics and Political Science*, 29(4), 475-485. - Okun, A. M. (1962). Potential GNP: its measurement and significance. *Proceedings of the Business and Economic Statistics Section, American Statistical Association*, 98-104. - Phillips, A. W. (1958). The relation between unemployment and the rate of change of money wage rates in the United Kingdom, 1861-1957. *Economica*, 25(100), 283-299. - Solow, R. M. (1956). A contribution to the theory of economic growth. *The Quarterly Journal of Economics*, 70(1), 65-94. - Taylor, J. B. (1993). Discretion versus policy rules in practice. *Carnegie-Rochester Conference Series on Public Policy*, 39, 195-214. - Dunlosky, J., Rawson, K. A., Marsh, E. J., Nathan, M. J., and Willingham, D. T. (2013). Improving students' learning with effective learning techniques. *Psychological Science in the Public Interest*, 14(1), 4-58. Official pages checked October 2026: Federal Reserve, 2025 Statement on Longer-Run Goals and Monetary Policy Strategy (federalreserve.gov); European Central Bank, press release on the 2025 strategy assessment, 30 June 2025 (ecb.europa.eu); NBER Business Cycle Dating (nber.org); IMF press release 25/072 on BPM7 and SNA 2025, 20 March 2025 (imf.org). ## Answer key **Self-test.** 1. $9000 + 2500 + 2700 + 1800 - 2000 = 14{,}000$. 2. $1.071/1.045 - 1 = 2.49$ percent (the shortcut gives 2.6). Excel: `=(1+7.1%)/(1+4.5%)-1`. 3. $5.0 + 0.5 \times 3.0 + 0.5 \times 1.0 + 2 = 9.0$ percent. 4. $314.2/302.5 - 1 = 3.87$ percent. Excel: `=314.2/302.5-1`. 5. $1.06/1.035 - 1 = 2.42$ percent (shortcut 2.5). 6. $8.4/168.0 = 5.0$ percent. 7. The NBER committee judges depth, diffusion and duration across many measures (GDP and income, employment, real income); a downturn can qualify without two negative GDP quarters (2001), and two small negative quarters need not qualify. 8. It must show net inflows of the same size: the country borrows from or sells assets to the rest of the world to finance the deficit. 9. A higher policy rate raises the return on home-currency deposits and bonds; investors buy home-currency assets; demand for the home currency rises and it appreciates (expected future rates and risk matter too, see mba/mba-fx-interest-parity-card). 10. The forward contracts fix this year's rate on half of forecast purchases, so reported costs rise less this year. But if the euro stays strong, every new hedge is struck at the new, higher rate; the hedge buys time to adjust prices, sourcing and assortment, it does not remove the economic exposure. **Mini-case.** See the teaching note below. ## Teaching note: Northfield Outdoor Co. **Teaching objectives.** Translate macro variables into P&L lines; separate transaction, translation and demand exposures; see how one central-bank decision reaches a firm through several channels; and design decision rules for scenarios rather than bet on a forecast. **Question 1: size the shocks (USD m).** | Shock | Calculation | Excel | EBIT effect | |---|---|---|---| | Euro +10 percent, 50 percent hedged | $99.84 \times 10\% \times 50\%$ | `=99.84*10%*50%` | -4.99 | | Euro +10 percent, if unhedged | $99.84 \times 10\%$ | `=99.84*10%` | (-9.98) | | Canadian dollar -6 percent, revenue | $86.4 \times 6\%$ | `=86.4*6%` | -5.18 | | Canadian dollar -6 percent, operating cost saving | $20.0 \times 6\%$ | `=20*6%` | +1.20 | | US volume -3 percent at 48 percent gross margin | $393.6 \times 3\% \times 48\%$ | `=393.6*3%*(1-52%)` | -5.67 | | Total EBIT effect (hedged) | $4.99 + 3.98 + 5.67$ | `=SUM(...)` | -14.64 | | Rate +150 bp on USD 120m floating | $120 \times 1.5\%$ | `=120*1.5%` | Interest +1.80 | The largest single shock to EBIT is the US demand slowdown (5.67), ahead of the hedged euro effect (4.99) and the Canadian net effect (3.98). Without the hedge, the euro would be the largest (9.98). EBIT falls from 70.40 to 55.76; interest rises from 11.60 to 13.40; profit before tax falls from 58.80 to 42.36, a decline of 16.44 or 28.0 percent. Unhedged, EBIT would have been 50.76. ```vega-lite { "$schema": "https://vega.github.io/schema/vega-lite/v5.json", "description": "Northfield EBIT bridge from baseline to shocked plan, USD m (fictional mini-case)", "width": 380, "height": 220, "data": {"values": [ {"Step": "1 Baseline EBIT", "Value": 70.4, "Type": "Level"}, {"Step": "2 EUR cost, 50% hedged", "Value": -4.99, "Type": "Change"}, {"Step": "3 CAD translation, net", "Value": -3.98, "Type": "Change"}, {"Step": "4 US volume -3%", "Value": -5.67, "Type": "Change"}, {"Step": "5 Shocked EBIT", "Value": 55.76, "Type": "Level"} ]}, "mark": "bar", "encoding": { "x": {"field": "Step", "type": "nominal", "title": null, "sort": null, "axis": {"labelAngle": -30}}, "y": {"field": "Value", "type": "quantitative", "title": "USD m"}, "color": {"field": "Type", "type": "nominal", "title": null} } } ``` **Question 2: coverage and covenant.** Interest coverage falls from $70.40/11.60 = 6.07$ times to $55.76/13.40 = 4.16$ times. EBITDA falls from 95.40 to 80.76, so net debt to EBITDA rises from $170/95.40 = 1.78$ times to $170/80.76 = 2.11$ times: still inside the 3.0 times covenant. EBITDA could fall to $170/3.0 = 56.67$ before the covenant bites, a further drop of about 24 from the shocked plan. Excel: `=170/(55.756+25)`. **Question 3: what the hedge does.** It removes 4.99 of the 9.98 euro cost increase for the next twelve months, because half the purchases are bought at the old forward rate. It does not protect the unhedged half, purchases beyond twelve months, or competitiveness: if the euro stays strong, every new forward is struck near the new rate. The hedge buys time to re-source, re-price or redesign the assortment. Extending hedges now locks in today's rate, which helps if the euro rises further and hurts if it falls back; the policy question belongs in finance/fx-interest-rate-hedging-policy. **Question 4: price increase on euro-sourced lines.** Those lines carry USD 99.84m of cost at a 52 percent cost ratio, so their revenue is $99.84/0.52 = 192.0$. Offsetting the hedged cost increase with no volume loss needs a price rise of $4.99/192.0 = 2.6$ percent. With an elasticity of -1.5, volume falls about 3.9 percent. After the hedged cost increase the lines cost $99.84 + 4.99 = 104.83$, so gross profit on them without a price change is $192.0 - 104.83 = 87.17$; with the price rise it is $(192.0 \times 1.026 - 104.83) \times 0.961 = 88.57$, a gain of only 1.40 rather than 4.99. Excel: `=(192*1.026-104.832)*(1-1.5*2.6%)-(192-104.832)`. The price rise recovers less than a third of the hit and risks share in a slowing market; selective increases on the least price-sensitive lines (technical shells, boots) and sourcing changes are better levers. Link the elasticity work to mba/mba-demand-elasticity-card and mba/mba-pricing-card. **Question 5: one decision, three channels.** The rate rise cools demand (households face higher borrowing costs and lower asset values, so discretionary outdoor purchases fall), raises Northfield's financing cost directly through the floating revolver, and, in the transmission map, affects the exchange rate. Here the euro rose against the dollar even though US rates went up: currency moves depend on relative policy and growth expectations and on capital flows, and better euro-area growth news plus rate expectations already priced in can dominate. That is the lesson of mba/mba-fx-interest-parity-card: interest differentials explain forward rates, not reliably the direction of spot. **Question 6: decision rules by scenario.** | Scenario | Triggers | Pre-agreed actions | |---|---|---| | Rates high for a year | Policy rate unchanged at two meetings, core inflation above 3 percent | Fix up to 50 percent of the revolver with a swap (board approval), extend euro hedges to 75 percent within policy limits, raise prices selectively on low-elasticity lines, slow store openings | | Recession and rate cuts within six months | Two monthly falls in real consumer spending, unemployment up 0.5 points, first rate cut | Keep the revolver floating, cut inventory buys 5 to 10 percent, protect volume on entry price points with private label, preserve covenant headroom, prepare opportunistic lease negotiations | | Both | Any time | Monthly macro dashboard to the executive team; re-run this sensitivity table each quarter | A strong answer recommends no single forecast, quantifies the exposures, uses hedging to buy time rather than to speculate, and names triggers and owners. ## Revision history | Version | Date | Author | Change summary | |---|---|---|---| | 0.1 | YYYY-MM-DD | [Your name] | Copied roadmap from my syllabus | | 0.2 | YYYY-MM-DD | [Your name] | *Example:* Solved the Northfield case, refreshed dated facts from the central-bank pages | ## Standard and licence note Based on the standard content of MBA core macroeconomics courses, the primary works listed above (Keynes 1936, Solow 1956, Phillips 1958, Okun 1962, Fleming 1962, Mundell 1963, Friedman 1968, Kydland and Prescott 1977, Taylor 1993) and the official central-bank, NBER, United Nations and IMF pages named in the text, checked in October 2026. The text, the roadmap, the mini-case, the exhibits and the questions are original; no textbook text or published case is copied or paraphrased, and the companies and people are fictional. The template is independent and not affiliated with or endorsed by any business school, central bank or statistical agency. Check the current official pages before you rely on any dated fact. Template licence: MIT.