Macro Econ Ex5/final

Front 1

Efficient Market Hypothesis

Back 1

we cannot systematically outperform the market
so take market average at lowest possible cost.

Front 2

reducing risk

Back 2

most people are risk averse
to take more risk we need more higher offered expected returns
risk is related to the variable of economic returns (volatility)

Front 3

Manage risk

Back 3

use insurance
(auto, homeowner, renters, disability, health insurance)

Front 4

Strategies for reducing risk

Back 4

diversify of assets(don't put all eggs in one basket)
Mutual finds (w/ diversify)
Balance sheets(assets/lib/equities)

Front 5

Problems that arise in insurance markets

Back 5

1. Moral hazards (related to people's behavior changes once they become insured) [take more risks]
2. Adverse selection (occurs before insurance is offered (risky people choose insurance and this causes potential market failure)

Front 6

Monetary Economy

Back 6

allows people to specialize in production (lowers transaction costs and encourages econ efficiency)

Front 7

Money

Back 7

Anything generally accepted as payment for goods/services in settling debts and is an asset of it's holder

Not credit cards (liab.)

Front 8

currency

Back 8

federal reserve note, hold by non-bank public
currency is money, but money is more than currency

Front 9

income

Back 9

only has meaning when time unit is specified (when is the flow of earnings? is it $50,000 a yr or and hour?)

money has meaning regardless of time period

Front 10

wealth

Back 10

money is a part of wealth, but wealth is more than money

Front 11

3 functions of money

Back 11

1. it's a medium of exchange (pay for things)
2. standard of value (the identity of the value)
3. Store of value (the function of an asset that can be saved, retrieved and exchanged at a later time)

Front 12

2 ways US measures it's money supply

Back 12

317.9mill u.s. pop., $3,745/person
1. [M1] narrowing deffined money supply
M1=C+D
----Grew @ 10.8% annual rate
2. [M2] broadly deffined money supply (march 2014 $2,744.7 billion)
M2=M1+Savings Deposits($7246.2bill)+Small Denomination(533.1bill)+Retail Money($639.8bill)
----grew @ 6.1% annual rate
Currency in circulation -> $1190.6 bill.
Travelers Checks -> $3.4 bill.
checkable deposits -> $11550.7 bill.

Front 13

.

Back 13

.

Front 14

Equation of exchange

Back 14

-V=(PQ)/M
MV=P*Q

Front 15

Quantity Theory (of money)

Back 15

# of times on avg. that a dollar is used to purchase final g/s over a period.

long run theory of moneys impact on economy
1. Velocity is constant
2. in long-run, output is a dollar is determined by supply related factors and loan be conceived fixed.

Front 16

Quantity Theory- (long run theory)

Back 16

MV=PQ
both are constant
if V&Q are constant then when M(+) P(+)
If M(+)V(-)=PQ no effect of monetary policies are felt in the econ.

Front 17

Securites

Back 17

-If feds want to provide more liquidity in financial markets they buy more securities
-they have to be careful w/ inflation (except in a financial crisis)
-since 2008 a change in fed res. bal. sht. (banks were holding 9mil.)
-march 2014 fed bal. sht. now has 4 tril. of securities
___2.3trill. treasury securities
___1.6trill. of mortgage backed securities
___2.7trill. banks are holding

Q1 2014 U.S. real GDP grew @ 1% (b/c affected by weather/snow)

Front 18

Federal Reserve

Back 18

-Created in 1913
-U.S. central bank, oversees money/credit supply, influences interest rates
-undertakes monetary policy in order to achieve a dual mandate
-independant branch
-"lender of last resort"
- can create liquidity when funds are not avalable

Front 19

Duel Mandate

Back 19

received from congress
-higher employment(stability) at the natural rate of unemploy.
-low inflation: target for annual inflation is 2% (pay attention to the Personal Consumption Expenditures (PCE) Deflator)

Front 20

3 components of fed reserve system

Back 20

1. Federal reserve Board (board of Gov)
2. Federal Reserve Banks (12)
3. Policy tools of fed

Front 21

1. Federal reserve Board

Back 21

-in washington DC
-appointed(not voted into) by US president and confermed by US senate
-14yr term, nonrenewable term
-appointed every 2yrs
-each governor must come from a different part of fed. res. districts
-a chair [Dr. Jonet Yellen] is selected by the president (4yr term renewable)

Front 22

2. Federal Reserve Banks (12)

Back 22

Functions of FRB
1. Check clearing
2. oversees electronic funds
3. Research
4. Liaison between commercial banks
5. bank examination/supervision & businesses
6. Evaluate merger apps of banks
7. Introduce new currency/withdraw damage currency
8. involved in econ./finantial edu.
9. serve as gov. banker
10.makes discount loans (.75%) [loan to banks w/ fixed interest rates]
11. president of FRB serves as a voting member on 12 voting members
-meet 8x/yr, establish policies for market operations

Front 23

3. Policy tools of fed

Back 23

1. discount policy (discount rate)
2. setting reserve requirements (reserves=>vault cash(banks))
-required reserves ratio: % of checkable deposits that banks inform of reserves (as high as 10%)
3. open market operations
-fed buys sells existing securities
-open market purchase
-open market sale
sell securities
-fund rate-rate