7. Economic fluctuations and the financial system Flashcards
1
Q
What is the monetary transmission mechanism?
A
The actual process through which monetary policy affects output. It involves financial markets and banks
2
Q
What rates affect aggregate expenditure?
A
Medium and long-term rates. However, the Fed controls short-term rates: the federal funds rate
3
Q
What is the term structure of interest rates?
A
It is also called yield curve. It shows the relationships of interest rates of a bond and its maturity.
4
Q
How can relationships between interest rates and maturity be analyzed?
A
Using the expectations theory of the term structure
5
Q
How do changes in Asset prices affect aggregate expenditure?
A
- Wealth and consumption
- Stock prices and investment
- Effects on collateral
6
Q
What are the effects on financial markets when federal funds rate increases?
A
- longer term IR rises
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