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90 Cards in this Set
- Front
- Back
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1. Explain why markets (e.g., stock market, real estate market) fluctuate even without any government interference.
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Herding behavior - People see other doing well in a certain part of the market and will copy them to try and make the same return which can increase prices (real estate) |
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Explain the recent real estate bubble and crash |
People began investing money into real estate and were receiving high returns, others began to follow suite and real estate prices continued to go up causing a bubble |
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3. Why are too high (too low) prices in a particular industry or market harmful?
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When prices are too high, there were too many buildings tat were built and real estate investment decisions were affected |
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Explain how the market corrects itself |
Increase in borrowing pushes interest rates up, Higher interest rates make investing less attractive and slow the rise in prices. People begin selling which leads to a decrease in prices |
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5. Why do we say that the recent real estate crash was not a problem but a solution? What was the problem?
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The problem was overinvestment while things were going well. The crash was the solution because it is like medicine and the sooner it happens the better |
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6. Give some examples showing how too high prices in real estate caused problems.
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Because people believed it was a good investment and everyone started investing which led to a market bubble |
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7. Why it is better for the overpriced market to crash sooner rather than later? |
If the crash is sooner then the bubble won't be as large and the crash will be much smaller |
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Why is ethics important |
Ethical norms affect businesses and financial markets directly and through legal systems |
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Why is it important to rely on principles? |
Principles simplify our decision making - we cannot estimate all consequences of our actions |
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3. How is the ethics of warrior cultures different from the ethics of later cultures?
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It justified robbing and enslaving people |
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4. How is Enlightenment period ethics different from the idea that you are your brother’s keeper?
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It had an expanded list of property including the property someone earns. Fundamental right is the right to one's own life, it is meant to make your life better |
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What are some of the virtues in ethics |
productivity, integrity, rationality, justice, benevolence should make your life better |
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Why the property right is important |
they provide an incentive for people to succeed economically |
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How can ethics affect economic development? |
It has the ability to lead enormous economic growth like it did during the enlightnement period |
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What is overoptimism (overconfidence) |
Believing that you are certain about something even though there is a chance you are wrong |
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Are smarter people less overoptimistic |
Smarter people are usually more optimistic. it is positively related |
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Can the same person be overly optimistic about some issues and overly pessimistic about others |
Yes |
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What is the effect of the past success on overoptimism |
It increases it |
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how can people learn to become less overoptimistic |
If they are given feedback about their performance and their performance is associated with rewards and punishments |
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7. What is the availability heuristic? How is it related to good and bad economics?
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We pay more attention to facts that are easy to recall. Good economics is paying attention to all consequences, bad economics is paying attention only to the most immediate and visible consequences |
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8. What is the broken window fallacy? How is this related to war? |
If you were to break a window then the glass company would have to make glass and the economy would stimulate. This does not work because less money would go to another sector. |
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9. Why public works do not work to stimulate economy?
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Because if you supply money to the public sector it will take money away from the private sector |
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What is rationalizing? |
Jumping to conclusions that one likes, noticing facts that confirm these conclusions and ignoring the ones that contradict it |
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11. Does the presence of behavioral biases imply that people are irrational?
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No it just meas that people cannot process an infinite amount of information instantaneously |
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12. How do the mechanisms like financial markets (or other markets) mitigate the effect of behavioral biases (e.g., overoptimism and rationalizing)?
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They help reduce the impacts of our mistakes and give us the opinions of professionals |
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What is a typical effect of government interference in financial markets on behavioral biases? Why?
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Governments tend to bail out underperformers. They cannot completely eliminate the negative effects. Can be overoptimistic because the government is run by people |
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What are the goals of the Sound Dollar Act? How does this act compare with the one introduced by Ron Paul |
Takes away political power, limit the purchase of treasury securities, maintain price stability. Comparison - Restrict federal reserve power and make it less reliant on government |
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Why was the Sound Dollar Act introduced? |
Federal Debt was rising, the economy was struggling and there was a higher unemployment rate |
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1. What ideas is the original U.S. Constitution based on? Does it allow a creation of a central bank? Why?
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The original U.S Constitution does not allow creation of a central bank. It was founded on the ideas of enlightenment, respect for the rights of individual human beings |
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2. How did the government interference in business changed after the Civil War?
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Government interference in business increased significantly and continued increasing |
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Capitalism |
Voluntary business interactions among people; government's role is to protect people from the use of force, threat of force, and fraud. |
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Statism |
State interferes (use force or threat of force) in business interactions supposedly for public good |
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How did the popularity of capitalism and statism changed throughout the U.S. history?
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in the early 20th century statism became quite popular. In recent years most economies are mixed |
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4. How many central banks there were in the U.S. history? Why?
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There have been 3 the first 2 had problems and were shut down. |
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5. How does the fear of monopolies affect central banks
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It causes people not to like them because they believe it has two much power |
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What are the differences between government granted monopolies and naturally occurring monopolies?
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Government enforced monopolies completely eliminate competition while naturally arising ones grow based off of having success and still face competition |
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6. Briefly describe the financial system in the U.S. during 1832-1914.
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There were no central banks, gold and silver were used as currency, people created IOU's and some were never intended to be paid back, banks went bankrupt during recessions |
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7. What were the goals of the National Banking Acts of mid-1860s? Did the acts achieve these goals?
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The goals were to help finance the civil war and improve the soundness of money supply. Not all the goals were achieved and some banks still went bankrupt |
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8. Why the 1907 crisis is important in the financial history? What role did large banks play in it? How does this crisis compare with the next big financial crisis after the creation of the Fed?
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In 1907 there was a crash and it recovered much faster than most crashed without having a central bank or federal reserve |
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9. What were the goals of the Federal Reserve Act of 1913? Did it achieve these goals?
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Authority to control nation's money supply, lender of last resort, efficient system for clearing checks, bank supervision to help reduce bank failure. NO |
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10. Describe the Federal Reserve System. What is its primary function?
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Economic stabilization through the management of money supply |
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11. Which regional Federal Reserve Bank website provides detailed economic data?
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Saint Louis |
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12. What role do the member banks play in the Fed system? Who are the member banks?
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They buy stock in their regional federal reserve but this doesn't represent ownership. They get no voting rights and receive a 6% dividend. All nationally chartered commercial banks and some state chartered commercial banks |
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Describe the board of governors |
Head - Sets nations monetary policy Board - serve 14 year terms and are appointed by the president and approved by the senate Chairman - chosen by the president from the governors for a 4 year term |
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14. Describe the Federal Open Market Committee.
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They determine monetary policy, the president of the bank of New York serves permanently as the president while others rotate |
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15. Who are the three most recent chairs of the Fed? How are they different?
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Dr. Yellen - Current Ben Bernanke - More interference Alan Greenspan - Very little interference in activities until the end of his service |
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How did the Fed power change over time |
It increased along with the number of regulations |
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Is the Fed Independent? |
It is. different countries believe that fed independence is negatively correlated with inflation |
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Why do we care about inflation |
It determines pricing and that state our economy is in |
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19. What are the main Fed assets and liabilities? How did they change after the financial crisis? |
Assets - Government securities ( 90, 30), mortgage backed securities (0,50), how the money was used Liabilities - Fed notes (90,40) Depository reserves (2,45), treasury deposits (1,9), how the money was obtained |
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Buying T bonds |
Increases money supply |
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Selling T bills |
Decreases Money Supply |
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Which tools of monetary policy can the Fed use |
Open market operations, discount rate, reserve requirement |
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21. Explain open-market operations.
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Buying or selling government securities through the fed bank of New York, the most important tool |
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22. Explain the changes in the discount rate.
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The interest rate that the financial institutions must pay to borrow reserve deposits |
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Discount rate increases |
Money supply decreases |
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Discount rate decreases |
Money supply increases |
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23. Explain the changes in the reserve requirements.
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The cash that must be physically held in a banks vault |
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Reserve Requirement increase |
Money supply decreases |
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Reserve Requirement Decrease |
Money supply increases |
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M1 |
=Currency + Checking Deposits |
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M2 |
= M1 + Saving deposits, money market deposit accounts, overnight repurchase agreements, non-institutionalized money market mutual funds, and small time deposits |
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MZM (Zero maturity money) |
M2 - small denomination time deposits + institutional money market mutual funds |
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2. Why do we include other things than currency in the measures of money supply? |
Things other than currency can be used for transactions |
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3. Why do we care about money supply?
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It can effect interest rates and the state of the economy |
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What is the fed funds rate? |
Interest rate at which commercial banks borrow from eachother |
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How can the fed attempt to control interest rates |
Change in the discount rate, open market operations, reserve requiremetns |
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What determines interest rates |
The supply and demand for funds |
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What did you learn in class about Keynes? |
Did not help us get out of the depression of 1930, made unrealistic assumptions, increased government spending |
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Friedman |
Best monetary economist, looked at actual data of what is happening |
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What are the objectives of monetary policy |
Full employment, economic growth, price stability, interest rate stability, stability of financial system, stability of foreign exchange markets |
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Is Fed achieving these goals in recent years? |
NO |
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11. Is Fed more active in recent years?
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Yes |
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12. In which theoretical scenario there can be a negative relation between inflation and unemployment?
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If prices went up unemployment went down because companies were making more money |
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13. Why there is no negative relation between inflation and unemployment in real life?
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Because prices aren't directly correlated with unemployment |
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14. What was the impact of Fed’s monetary policy on the recent real estate bubble and financial crisis?
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More people were attracted to the real estate market, people were able to borrow money for cheap from the reserve, bubble began to expand larger and larger |
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15. What is the velocity of money? Why is it important?
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How many transactions that the same dollar bill would make in a month, it shows money supply |
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16. Did economy become less volatile since the creation of the Fed?
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No |
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17. Did recovering from crisis become faster since the creation of the Fed
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No |
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In general it is better for the economy when overpriced market crashes sooner rather than later (T/F) |
True |
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The statement "you are your brother's keeper" is inconsistent with the enlightenment period (T/F) |
True |
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Keynes models correctly predicted the stock market crash in 1929 and helped the country recover from the great depression |
False |
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Which of the following does not take deposits? |
Finance Companies |
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New issues of securities are sold in the secondary market (T/F) |
False |
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The main goal of financial intermediaries is |
The maximization of shareholder wealth |
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The primary responsibility of the Federal Open Market Committee is to |
Set monetary policy |
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The Fed gets most of its financing by |
Printing federal reserve notes and obtaining deposits form depository institutions |
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To increase the money supply immediately but just slightly, the fed would most likely |
buy securities on the open market |
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Which of the following statements is incorrect |
The fed power increased significantly since its creation because fed was instrumental in achieving stability in financial markets and stable economic growth |
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The fed's decision to keep low interest rates during the real estate boom contributed to the overvaluation of real estate assets and thus exaggerated the subsequent decline in real estate prices (T/F) |
True |
