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47 Cards in this Set

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Classical Economic Theory

Economic freedom, free competition, laissez-faire, wealth is based on trade, markets regulate themselves without coercion



Keynesian Economic Theory

Advocates for increased gov't expenditures and lower taxes to stimulate demand (demand side theory that focuses on changes in the economy of the S/R)



Arbitrage

Profiting off of simultaneously buying and selling an asset from the difference in price

Advantages of futures of forwards

Futures are exchanged on a public market, making it more easily regulated

Hedging

Making an investment to reduce the risk of adverse price movements in a market

Credit Default Swaps

A swap that transfers the credit exposure of fixed income products between parties; the purchaser of the swap makes payments to the seller until the maturity of their contract, and in return the seller agrees to pay off a third party debt

CDS Risk Shift

A CDS shifts risk onto an insurance company (or other CDS seller) in exchange for a premium

CDS Buyer

Bond buyer, lender, exchanges bond for interest

Bond issuer

Borrower

CDS Seller

Guarantees underlying debt between the bond issuer and buyer; insures the principal amount for the CDS buyer, and in the case that the bond issuer defaults, will pay the principal back to the CDS buyer

Three players in the Money Supply Process

The Fed, banks, depositors

Fed's Balance Sheet

Assets: gov't securities, discount loans (provide reserves to banks and earn the discount rate)




Liabilities: currency in circulation, reserves (bank deposits at the Fed)

Open Market Sale

Reduces the monetary base by the amount of the sale

Factors that determine the money supply

1. Changes in the required reserves ratio (supply is negatively related to the reserve ratio)




2. Changes in currency holdings (supply is negatively related to holdings)




3. Changes in excess reserves (supply is negatively related to the amount of reserves)

M1

Currency, checkable deposits

Money multiplier

Amount of money that banks generate with each dollar of reserves, which is the amount of deposits that the Fed requires banks to hold and not lend




Money Supply = Monetary Base x Money Mult.

3 Tools of the Fed

Open market operations, setting the fed funds/discount rate, setting the serve requirements

Effect of the Fed's open market purchases

An open market purchase causes the fed funds rate to fall whereas an open market sale causes the fed funds rate to rise

Effect of the Fed raising reserve requirements

Fed funds rate rises (fed funds rate falls when the Fed decreases reserve requirement)

A rise in the interest rate on reserves causes the Fed funds rate to...

Increase

Lowering the discount rate shifts the supply curve down and ___ the Fed funds rate

Lowers

Monetary Policy Tools of the ECB

Open market operations, lending to banks, reserve requirements (2% of the total amount of checking deposits)

Nominal Anchor

Nominal variable such as the inflation rate or money supply, which ties down the price level to achieve price stability

Goals of Monetary Policy (5)

High employment, economic growth, stability of financial markets, interest rate stability, stability in foreign exchange markets

Hierarchical Mandates

Put the goal of price stability first, and as long as it is achieved then other goals can be pursued

Dual Mandates

Aimed to achieved to equal objectives: price stability and max employment

Fed's "Just Do It" Approach

Monetary policy with an explicit goal, but not an explicit nominal anchor




Forward-looking and has demonstrated success, discourages expansionary monetary policy




Suffers from a lack of transparency and accountability from the central bank

M2

M1 and "near money" (savings deposits, money market mutual funds, time deposits)

Spot transaction

Immediate (two-day) exchange of bank deposits

Forward transaction

The exchange of bank deposits at some specified future date

Exchange rate

The price of domestic assets in terms of foreign assets




Supply curve for domestic assets is fixed vertically




Demand curve for domestic assets depend on the relative expected return of those assets (at lower current values of the dollar, the quantity demanded of dollar assets is higher)

Upward shift in domestic exchange rate

Increase quantity demand (Qd) of domestic assets, outward shift (increase) in demand curve

Increase in foreign interest rate

Decrease in Qd of domestic assets, inward shift in demand curve

Increase in expected domestic price level (relative to other countries)

Decrease in Qd for domestic assets, inward shift in demand curve

Increase in expected trade barriers (relative to other countries)

Increase in Qd for domestic assets, outward shift of demand curve

Increase in expected import demand

Decrease in Qd, inward shift of demand curve

Increase in expected export demand

Increase in Qd, outward shift of demand curve

Increase in expected productivity

Increase in Qd, outward shift of demand curve

Monetary Base

The total amount of currency that is in the hands of the public and commercial bank deposits held in the central bank's reserves




CU + RES

Aggregate demand is made up of which four components

1. Consumption expenditure




2. Planned investment spending




3. Gov't purchases




4. Net exports

Increases of which four components (in addition to money supply) shifts AD right?

Consumption, government spending, net exports, investment

L/R Aggregate Supply curve

Vertical at the natural rate of output

S/R Aggregate Supply curve

Upward sloping as firms try to take advantage of short-run profitability when price level rises

Difference between movements and shifts on a demand curve

Shifts happen when consumers change their perceptions about the worth of a product, movement occurs when the price of a product changes

Calculation of money supply

CU + DEP



Building blocks of money supply

Monetary base (BASE = CU + RES)




Reserve deposit ratio (RES/DEP)




Currency deposit ratio (CU/DP)



Negative demand shock

Decreases demand