Economic Concepts

Question 1

Open Market Operations

Answer 1

Adjusted daily by Federal Reserve Trading Desk in NY

repurchase and reverse repurchase agreements with dealers

Repo- repurchase - Fed gives dealers money in exchange for pledge of gov securities (buy bonds) - Loosen

Reverse-repo - Fed give dealer pledge of gov securities in exchange for money(sell bonds) - Tighten

Question 2

Reserve Requirements

Answer 2

Amount of money banks must hold in reserve from deposits (% must maintain in cash)
Increasing will tighten credit and increase interest rates
Decreasing will loosen credit and decrease interest rates
Fed rarely changes this rate

Question 3

Discount Rate

Answer 3

Rate Fed charges member banks to borrow reserves.
Increasing discount rate will tighten credit
Decreasing discount rate will loosen credit

Question 4

Margin - Monetary Policy

Answer 4

Fed sets initial margin requirements
Increases to margin requirements - tighten
Decreases to margin requirement-loosen

Question 5

Feds Fund Rate

Answer 5

overnight bank to bank borrowing- set at auction

Question 6

Excess Reserves

Answer 6

Money in excess of reserve requirement that banks hold at FED or central bank

Increase in excess reserve rate = more banks will hold onto money and less in economy…tighten

Decrease in excess reserve rate = more banks will less money, which increases money to lend. Loosen.

Question 7

Prime Rate

Answer 7

The interest rate that commercial banks charge their most credit-worthy customers. Generally, a bank’s best customers consist of large corporations.
Largely determined by the federal funds rate, which is the overnight rate that banks use to lend to one another;
Directly affects the lending rates available for a mortgage, small business loan or personal loan.

Question 8

Leading Economic Indicators

Answer 8

1. Initial Claims for unemployment insurance
2. New manufacturing orders
3. New private housing units
4. Stock Prices (500 common stocks)
5. Index of consumer expectations
6. Contracts/orders for plants/equipment
7. Interest rate spread
8. Money supply
9. Average weekly hours for production manufacturing workers
10. Vendor performance- % companies reporting slower deliveries

Question 9

Coincident Indicators

Answer 9

1. # employees on non-agricultural payrolls
2. Personal Income (less transfer payment -ss, welfare)
3. Industrial Production

Question 10

Lagging Indicators

Answer 10

AKA; Confirming Indicators

1. Average duration of unemployment
2. Average prime rate changed by banks
3. Commercial and industrial Loans Outstanding
4. Ratio of consumer installment credit outstanding to income
5. Change in CPI

Question 11

Recession/ Depression

Answer 11

Recession 2 consecutive quarters of decline in real GDP (6 months)

Depression- recession 6 consecutive quarters (18 months)

Question 12

GDP

Answer 12

*The index is a broader measure of the overall change in price than the CPI and the PPI

US total production of goods and services

Newly produced goods and services with in countries boundaries

Foreign cars made in US included

Values for real GDP are adjusted for differences in prices levels, while figures for nominal GDP are not.

Values for real GDP are adjusted for varying price levels where GDP is not (inflation adjusted)

Question 13

CPI

Answer 13

Basket of selected goods and services (individuals)

• measures the difference between the total value of the basket of goods you normally buy today with the total value of the same basket of goods from a base year
  1. Food and beverages
  2. Apparel
  3. Education and communication
  4. Housing
  5. Transportation
  6. Recreation
  7. Medical care
  8. Other goods and services

Question 14

PPI

Answer 14

(Producers)
*inflationary warning since an increase in prices of raw materials being fed to producers to create their final product greatly affects their wholesale pricing to retailers.
Price of various products like farm products and commodities

NO value of services

Leading indicator to inflation

*as costs rise they are past to consumers and ultimately CPI

Question 15

Business Cycle

Answer 15

Movement in economic activity

Expansion (recovery) - Increasing GDP, interest rates and inflation. Productivity rising, labor cost falling. Activity expanding.

Peak- GDP at its highest. Inflation and interest rates peaking. Unemployment lowest. When business activity ages (public stops buying; they have what they need).

Contraction (recession) Slowing of GDP, decreasing interest rates and inflation. Unemployment increasing. Productivity falling, labor cost rising.

Trough - Public starts buying; unemployment at highest, interest rates, inflation and GDP lowest.

Question 16

Durable Goods

Answer 16

A hard good that does not easily wear out - (perform well in recovery/expansion)

cars, appliances, home furnishings, photographic equipment, recreational goods, etc..

Consumer durables and capital goods cyclical and fluctuate directly with business cycle

Question 17

Non- Durable Goods

Answer 17

Soft Goods or consumables - short life span or used once. “you always need them” Not affected by a recession.

cosmetics, food, fuel, office supplies, paper, personal products, plastic, clothing, footwear

Question 18

Inflation

Answer 18

Rise in the price of goods and services
Too much money chasing too few goods
CPI- lagging indicator to inflation
PPI - Leading indicator it inflation

Question 19

Deflation

Answer 19

Decline in the price of goods and services

Disinflation - slowing down of price increases

Individuals hold cash - can buy more goods and services at decreased prices.

Question 20

Stagflation

Answer 20

slow economic growth
high unemployment
rising prices

Question 21

Yield Curve

Answer 21

Shows the market rate of interest for bonds that have:
different maturities (term to maturity)
same credit ratings (bond quality)
same tax status
different yield to maturity (curve)

Normal: (positive slope) as maturities lengthen, yields increase.

Inverted: (negative slope) FED tightens short-term credit to slow economy - short term rates rise above long-term. Happens when economy is overheating.

Question 22

Elastic/Inelastic Demand Curve

Answer 22

Elastic - almost horizontal (down to the right)
small change in price =large change in quantity demanded

Inelastic- almost vertical (down to the right)
small change in price = little change in demand

Question 23

3 Goals of the FED

Answer 23

1. Maintain long-term economic growth
2. Maintain price levels supported by economy
3. Maintain full employment