Analysis Flashcards
Analysis that is concerned with
- Monetarist policies as implemented by the FRB through its open market committee
- Fiscal vs. monetary policy
- Economic indicators, leading, lagging, and coincident
- Specific company balance sheet and income statement information
Fundamental Analysis
Measurement of total national output of goods and services
Gross Domestic Product (GDP)
Measurement that gauges inflation by measuring costs in constant dollars. Inflation is defined as too many dollars chasing too few goods and services.
Consumer Price Index (CPI)
First stage of the economic cycle where inflation is experienced and culminates at the peak of the economy.
Expansion Phase
When the economic cycle lingers at the economy’s peak, we sometimes experience continuing inflation and rising prices with no economic growth.
Stagflation
A period of falling prices when decline follows the peak of the economic cycle, where too few dollars are chasing too many goods and services.
Deflation
Two consecutive quarters of decline in the market is called a…
Recession
Six consecutive quarters of decline is called a…
Depression
When the decline phase of the economic cycle ends and the economy bottoms out, this is called the…
Trough
Involves the president and congress passing bills and appropriations that influence economic activity
Fiscal Policy
Primary tool of fiscal policy that allow congress to lower taxes which increases economic activity, or raise taxes to decrease economic activity, as well as increase transfer payments, such as social security or tax rebate programs, to stimulate the economy.
Federal taxation and spending
What government body is able to spend money they do not possess, and can authorize borrowing the money needed to stimulate the economy?
Congress
What government body is able to increase its own spending on capital projects, military, and or social programs to stimulate the economy?
Federal Government
What happens when the government decreases spending?
Economic activity decreases
During the great depression, this economist developed the economic theory that advocated using fiscal policy to jump-start the economy to full employment. He believed that the economy runs at an equilibrium that is determined by income and spending, and aggregate demands. If people are out of owkr, they don’t spend. The government has responsibility to stimulate the economy to full employment.
John Maynard Keynes
Keynesian Theory
Doctrine that says as long as the government does not meddle with the economy, business will take care of itself. Stable interest rates, money supply, and low inflation achieved through monetary policy will enable business to drive the economy to full employment.
Supply Side Economics
Entity that is mainly based in New York that controls a system of member banks in major cities across the US and uses monetary policy.
Federal Reserve Bank (FRB)
The Fed
If the FRB believes that the economy is growing too quickly (which might cause inflation), it will tighten the money supply to slow the economy. What does this do?
It makes money scarcer and causes interest rates to rise.
If the FRB wishes to stimulate the economy, it will ease the money supply. What does this do?
It causes interest rates to drop, and speeds economic growth.
The most powerful tool for controlling monetary policy that is an overnight cash reseve that each federal reserve member bank must maintain each night, which is lowered to increase money supply, and raised to tighten money supply. It is powerful because it has a multiplier effect throughout the economy. Each night, every member bank calculates this. If they are short, they borrow cash from another member or the man Fed in NY.
Reserve Requirement
Rate set by the Fed that the FRB charges member banks for loans to meet their overnight loan requirement.
Discount Rate
How often does the FRB meet to consider whether or not to change the discount rate?
Quarterly
If a member bank is short funds to satisfy its reserve requirement, what does the bank do?
Attempt to borrow from another member bank.
The interest rate assessed when member banks lend to each other, which is the average of all interest rates charged by member banks for these overnight loans. It is extremely volatile because it can literally change overnight. It is not set by the FRB.
Fed Funds Rate
Most often used FRB tool where treasuries in the secondary market are bought and sold to slow or stimulate the economy.
Federal Open Market Operations
Entity that buys or sells securities in the secondary market through primary government securities dealers to help stimulate or slow the economy.
Federal Open Market Committee (FOMC)
If the Fed is buying treasuries, they are putting money into the economy. What does this do to the economy?
It increases the money supply and stimulates the economy.
If the Fed is selling treasuries, they are pulling money out of the economy. What does this do to the economy?
This shrinks the money supply, which slows the economy.
Measure of money supply that equals cash and demand deposits such as checking accounts. FOMC operation has the greatest effect on this measure.
M1
Broader measure of money supply that equals M1 plus savings account and some money market funds.
M2
Broadest measure of money supply that equals M2 plus institutional investors and money markets.
M3
International, decentralized, unregulated and high risk market, whose major participants are central banks and large multi-national corporations. There is no systematic reporting system for last sale information.
Interbank System
In the Interbank market, foreign currencies are traded in large blocks. What is the value of these blocks?
$1-$5 million
How long are spot transaction periods?
1 or 2 days
How long are forward transaction periods?
1, 2, 6, 9, 12, or 18 months
When the US dollar is strong, foreign currencies are weaker. This makes foreign goods cheap, so US imports increase and dollars flow out of the US. What does this do to the dollar?
The outflow weakens the dollar and creates a deficit trade balance.
As the dollar weakens, foreign currencies by comparison are stronger. This makes American products cheaper abroad, and U.S. exports to increase. What does this do to the US dollar?
The dollar grows stronger
