Economic Concepts Flashcards
Open Market Operations
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
Reserve Requirements
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
Discount Rate
Rate Fed charges member banks to borrow reserves.
Increasing discount rate will tighten credit
Decreasing discount rate will loosen credit
Margin - Monetary Policy
Fed sets initial margin requirements
Increases to margin requirements - tighten
Decreases to margin requirement-loosen
Feds Fund Rate
overnight bank to bank borrowing- set at auction
Excess Reserves
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.
Prime Rate
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.
Leading Economic Indicators
- Initial Claims for unemployment insurance
- New manufacturing orders
- New private housing units
- Stock Prices (500 common stocks)
- Index of consumer expectations
- Contracts/orders for plants/equipment
- Interest rate spread
- Money supply
- Average weekly hours for production manufacturing workers
- Vendor performance- % companies reporting slower deliveries
Coincident Indicators
- # employees on non-agricultural payrolls
- Personal Income (less transfer payment -ss, welfare)
- Industrial Production
Lagging Indicators
AKA; Confirming Indicators
- Average duration of unemployment
- Average prime rate changed by banks
- Commercial and industrial Loans Outstanding
- Ratio of consumer installment credit outstanding to income
- Change in CPI
Recession/ Depression
Recession 2 consecutive quarters of decline in real GDP (6 months)
Depression- recession 6 consecutive quarters (18 months)
GDP
*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)
CPI
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
PPI
(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
Business Cycle
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.
Durable Goods
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
Non- Durable Goods
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
Inflation
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
Deflation
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.
Stagflation
slow economic growth
high unemployment
rising prices
Yield Curve
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.
Elastic/Inelastic Demand Curve
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
3 Goals of the FED
- Maintain long-term economic growth
- Maintain price levels supported by economy
- Maintain full employment
