Capital Markets

Front 1

Classical Economic Theory

Back 1

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

Front 2

Keynesian Economic Theory

Back 2

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)

Front 3

Arbitrage

Back 3

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

Front 4

Advantages of futures of forwards

Back 4

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

Front 5

Hedging

Back 5

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

Front 6

Credit Default Swaps

Back 6

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

Front 7

CDS Risk Shift

Back 7

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

Front 8

CDS Buyer

Back 8

Bond buyer, lender, exchanges bond for interest

Front 9

Bond issuer

Back 9

Borrower

Front 10

CDS Seller

Back 10

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

Front 11

Three players in the Money Supply Process

Back 11

The Fed, banks, depositors

Front 12

Fed's Balance Sheet

Back 12

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)

Front 13

Open Market Sale

Back 13

Reduces the monetary base by the amount of the sale

Front 14

Factors that determine the money supply

Back 14

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)

Front 15

M1

Back 15

Currency, checkable deposits

Front 16

Money multiplier

Back 16

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.

Front 17

3 Tools of the Fed

Back 17

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

Front 18

Effect of the Fed's open market purchases

Back 18

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

Front 19

Effect of the Fed raising reserve requirements

Back 19

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

Front 20

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

Back 20

Increase

Front 21

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

Back 21

Lowers

Front 22

Monetary Policy Tools of the ECB

Back 22

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

Front 23

Nominal Anchor

Back 23

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

Front 24

Goals of Monetary Policy (5)

Back 24

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

Front 25

Hierarchical Mandates

Back 25

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

Front 26

Dual Mandates

Back 26

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

Front 27

Fed's "Just Do It" Approach

Back 27

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

Front 28

M2

Back 28

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

Front 29

Spot transaction

Back 29

Immediate (two-day) exchange of bank deposits

Front 30

Forward transaction

Back 30

The exchange of bank deposits at some specified future date

Front 31

Exchange rate

Back 31

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)

Front 32

Upward shift in domestic exchange rate

Back 32

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

Front 33

Increase in foreign interest rate

Back 33

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

Front 34

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

Back 34

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

Front 35

Increase in expected trade barriers (relative to other countries)

Back 35

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

Front 36

Increase in expected import demand

Back 36

Decrease in Qd, inward shift of demand curve

Front 37

Increase in expected export demand

Back 37

Increase in Qd, outward shift of demand curve

Front 38

Increase in expected productivity

Back 38

Increase in Qd, outward shift of demand curve

Front 39

Monetary Base

Back 39

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

Front 40

Aggregate demand is made up of which four components

Back 40

1. Consumption expenditure

2. Planned investment spending

3. Gov't purchases

4. Net exports

Front 41

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

Back 41

Consumption, government spending, net exports, investment

Front 42

L/R Aggregate Supply curve

Back 42

Vertical at the natural rate of output

Front 43

S/R Aggregate Supply curve

Back 43

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

Front 44

Difference between movements and shifts on a demand curve

Back 44

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

Front 45

Calculation of money supply

Back 45

CU + DEP

Front 46

Building blocks of money supply

Back 46

Monetary base (BASE = CU + RES)

Reserve deposit ratio (RES/DEP)

Currency deposit ratio (CU/DP)

Front 47

Negative demand shock

Back 47

Decreases demand