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35 Cards in this Set
- Front
- Back
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Monetary Policy
What / Who controls the FED? |
FOMC is fancy.
Federal Open Market Committee |
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What 5 Tools does the FOMC have at its disposal?
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- Open Market Operations (most effective)
- Changing the Reserve Requirement - Changing the Discount Rate - Changing the Margin Requirements for broker/dealers (least effective) - Moral Suasion |
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Open Market Operations Index Card
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Buy ---> $ into -----> Easy $/Credit/ Lower Interest Rates
FED BANKS PUBLIC Sell-----> $ Out ------> Tighter $/Credit/Higher Interest Rates The Fed buys or sells Government Securities (usually Treasury BILLS) to influence the economy. This is the most effective of the five tools the FOMC has. |
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The discount rate is what? When talking about FED tools and monetary policy.
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The discount rate is the rate that the fed charges member banks to borrow money.
Lowering this rate stimulates the economy. Raising this rate slows the economy. |
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What would the FED do to implement an easy money policy?
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Tools 1,2, and 3.
Buy Treasuries in the open market Lower the reserve requirement of member banks. AND Reduce the discount rate charged by the FED to member banks needing a loan to cover the reserve requirement |
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What would the FOMC do to institute a tight money policy>
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Tools 1,2, and 3.
Sell Treasuries in the open market. Raise the reserve requirement. And raise the discount rate. These actions would decrease the excess reserves. |
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Federal Funds Rate
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The rate member banks charge other member banks to borrow their excess reserve.
The banks that have the excess reserve set the federal funds rate on a day to day basis. The federal funds rate is higher than the discount rate. It is the most volatile rate in the money market. It is a leading indicator of interest rates. It requires no collateral. The "effective" rate is the daily average of all the transactions in the country A DECLINE IN THE FED FUNDS RATE WILL EXPAND THE MONEY SUPPLY. A RISE IN THE FED FUNDS RATE WILL CONTRACT THE MONEY SUPPLY. |
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REPO'S
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Repurchase agreements are traded between financial institutions.
Short term money market instruments It's an agreement to purchase US Government (or other) securities AT A FIXED PRICE, usually on overnight transactions. |
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Money Market Instruments
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1) T-Bills (most liquid)
2) Bankers Acceptances (least liquid) 3) CD's 4) Commercial paper 5) Federal Funds 6) Repurchase Agreements 7) Eurodollars 8) Variable Rate Demand Notes |
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As interest rates rise, the US dollar _________ and foreign currency values _________.
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As interest rates rise, the US dollar rises and foreign currency values fall.
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When the American dollar weakens.......
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US exports are more competitive & foreign imports are less competitive
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When the US dollar get stronger.....
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US exports are less competitive & foreign imports are more competitive
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The US Balance of Payments
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Is imports vs exports.
IF we are importing more goods than we are exporting - we have a deficit. The end result is spending more money than you are making. Dollars flow out of the country. |
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What's going to make the US Balance of Payments better?
Worse? |
Dollars coming into the country will make the deficit better. Dollars going out of the country will make the deficit worse.
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The floating exchange rate is determined by:
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The floating exchange rate is determined by the intervention of central banks and market forces (supply and demand).
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The IMF :
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The international monetary fund is an organization that promotes monetary and exchange stability in international trade
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The World bank :
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The World Bank assists developing countries by providing loans.
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Define Recession
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Decline in 6 consecutive months in stock prices, business activity, and employment.
OR 2 consecutive quarters of negative GDP growth |
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Define Recovery
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2 consecutive quarters of GDP growth
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Talk about an Inflationary Period
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Too much money chasing too few goods.
The Fed would tighten the money supply by selling government securities and raising the discount rate. * Full employment and high consumer spending contribute to inflation. |
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Which Federal Reserve Regs govern the extension of credit when securities are used as collateral?
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REG TUG
T - B/D U - Banks G - Others |
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Economic Theories
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Keynsian - Fiscal Policy
Monetarist - Monetary Policy Supply Side - Less government |
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M1 is?
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All currency in circulation
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M2 is?
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M1 + Repos, savings accounts, and CDS OF LESS THAN 100K
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M3 is?
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M2 + CDS OF 100K OR MORE
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Name 2 key leading indicators
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New orders for durable goods (goods with 3 year + life): appliances, furniture, etc.
Stock Prices |
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Name 2 coincidental indicators
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INDUSTRIAL PRODUCTION INDEX (not leading!)
GDP |
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Name 3 lagging indicators
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EXISTING housing sales
Unemployment Rate Bank interest rates (Prime) |
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Constant Dollars are?
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Constant dollars are dollars adjusted for inflation
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GNP
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Total value of all goods and services produced and shipped INSIDE AND OUTSIDE the country.
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GDP
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Total value of goods and services produced WITHIN US BOUNDARIES. IT INCLUDES ONLY INCOME DERIVED FROM WITHIN THE COUNTRY.
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GDP domino effect
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If GDP goes down
Corporate profits go down Dividends go down Security prices go down |
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Consumer Price Index (CPI)
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Monthly measure of change in average goods and servcices
Measures inflation Also known as the Cost of Living Index |
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Producer Price Index (PPI)
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Monthly measure pf the change in producer (whosaler prices)
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Disintermediation
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Large scale withdraw from savings accounts to put the money into money market and bonds.
This occurs when interest rates shoot up. (Inverse curve) |
