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25 Cards in this Set

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