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25 Cards in this Set
- Front
- Back
Name three factors that may increase the probability of a financial crisis.
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1. A sharp, unexpected rise in interest rates
2. Unexpected decreases in overall prices 3. Fall in stock values |
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What describes an increase in debt burdens caused by falling income and prices?
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Debt deflation
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Define financial fragility.
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The sensitivity of financial position to change in interest rates, incomes, and asset prices.
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What is the central feedback loop existing in a debt-deflation crisis?
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Debt difficulties lead to higher distress sales which leads to more deflation thus furthering distress sales.
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According to the imperfection view, what are the three causes of overindebtedness?
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1. Lack of information about borrowers
2. Lack of judgement capacity from lenders 3. Lack market competition |
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What is an imperfection of individuals?
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People tend to follow heuristics
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What does the high cost of information lead to?
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Imperfect information
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What are three causes of overindebtedness according to the uncertainty view?
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1. People forget about the past and overemphasize the present
2. People follow convention, social drives 3. Lending norms tend to loosen after a period of economic growth. |
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What is the quantity equation?
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MV = PQ
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Under the QTM, what is said about V and Q?
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V- the growth of velocity is constant
Q- growth of output is constant |
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What are two causes of inflation according to the QTM?
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1. Inflation rises because demand > supply
2. Inflation is from rising wages |
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What is the velocity of money?
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The speed money must circulate in order to complete all transactions
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According to the distribution theory of inflation, what is the cause of inflation?
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Growth of output
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What is the central difference between the distribution theory of inflation and the QTM?
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The QTM does not assume full employment
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Name three goals of monetary policy.
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1. Exchange rate stability
2. High unemployment 3. Price stability |
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What is recognition lag?
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The time it takes policymakers to realize that a change in the economy's performance has occured.
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What is policy lag?
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The time that elapses from the point when the need for action is recognized and when a legislative solution is enacted.
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What is an intermediate target?
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A target midway between the policy instruments and the ultimate policy goals.
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Name two ways the Fed targets interest rates.
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1. Targeting the Fed Funds Rate
2. Using Open Market Operations |
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What are RR?
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A tool used for monetary policy
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When using open-market operations, how does the central bank know that there is a shortage of reserves?
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The discount rate is at a low level
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If the central bank wants to tighten its monetary policy what should it do?
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Increase the Fed Funds Rate
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How is the interest rate on a primary loan determined?
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It is the Fed Funds rate target plus a mark up.
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Name three ways the central bank can loosen monetary policy.
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1. Decrease the Fed Funds Rate
2. Decrease the discount rate 3. Decrease the RR ration |
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T or F. Can the Money supply and interest rates be successfully targeted at the same time?
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False.
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