Fabozzi Chapter 6

Front 1

What do unstable prices do?

Back 1

retard economic growth, provoke volatility in interest rates, stimulate consumption, deter savings, cause redstribution of income and wealth

Front 2

What is stagflation?

Back 2

inflation and recession; associated with supply shocks

Front 3

What is frictional unemployment?

Back 3

reason that an unemployment rate of 0 is impossible; temporary unemployment due to changing jobs or seeking new or better ones; 4% to 6% is high level of employment

Front 4

What are the major goals of the Fed?

Back 4

1. stability in the price level
2. high employment
3. economic growth- cannot be too high because of inflation
4. stability in foreign currency exchange rates

Front 5

Problems with Fed policy?

Back 5

1. cause trade-offs, especially between inflation and growth
2. fed's power over variables that make up its goals is indirect

Front 6

What are operating targets?

Back 6

changes in them affect intermediary targets; a good target must exhibit: linkage, observability, and responsiveness; e.g. currency exchange rate; Fed targets short-term interest rates or some measure of reserves; fed-funds rate

Front 7

What are intermediary targets?

Back 7

interest rates or money aggregates; have a link with ultimate targets like such as output or employment; best known is money supply, also inflation, GDP-not readily observable, exchange rates

Front 8

What is the demand for money?

Back 8

aggregate demand of households for holding some of its wealth in the form of liquid balances such as deposits; Fed cannot forecast this so it cannot be certain how much impact any change in reserves will have on short-term rates; Fed must either target an interest rate or reserves cannot target both

Front 9

What is the fed funds rate?

Back 9

rate on interbank loans; if banks have alot of funds and lending capacity the rate is low

Front 10

What is the Keynesian view?

Back 10

fed reduces the fed funds rate by increasing bank system's reserves, banks reduces cost of loans, investors reallocate holdings from short-term securities to long-term raising wealth of investors in financial securities, declines in cost of funding will encourage firms to expand and increase output, consumers increase demand for more expensive goods; should lead to higher level of output and employment; also depends where economy is function, if near capacity policy will lead only to inflation

Front 11

What are nonborrowed reserves?

Back 11

equal total reserves minus reserves created when the bank borrows from the Fed; Volcker said fed would target this instead of fed funds rate to have a better sense of growth in the money supply

Front 12

What is monetarism?

Back 12

favors a steady, predictable growth in reserves and the monetary base; price stability is coupled with long-run economic growth

Front 13

What is discretion policy?

Back 13

Fed focuses on short-term adjustments in interest rates and economic activity; monetarists argue against it because of long and variable lag times

Front 14

What are borrowed reserves?

Back 14

funds that the banks borrow from the Fed through its discount window; usually goes up when Fed funds rate goes up in relation to the discount rate and banks borrow from the discount window; so it's like tracking the fed funds rate; when borrowed reserves rose then Fed bought securites