Final Exam Review - Short Answer Flashcards
Wealth and Fisher effect graphs!
NOW!
What is the Federal Government’s Budget constraint?
Government spending - tax revenues = change in bonds + change in money supply (printing money)
Define federal funds.
overnight bank-to-bank borrowing of reserves.
If the “shelter” component of the CPI in August 2024 was 401.545 and in July 2024 it was 400.234, what is the inflation rate for the month (annualized)?
3.93%
Calculate the present value of an investment that pays $4,500 received at the end of next year and $5,500 the end of the second year at an 8% discount (interest) rate.
$8,882.03
PV = FV/((1+r)^n)
2020 is the base year.
In 2020, you spent $37 on each pair of jeans a buying 3 pairs and bought T-shirts that cost $26 at each of the 4 concerts/activities that you “attended”. Food cost you $80 per week and because you only lived at home for six weeks during the year you had to buy food for 46 weeks. Finally, each of the 13 pizza “dinners” you were part of cost $12.
In 2021, you spent $39 on each pair of jeans and bought 4 pairs, you bought 5 concert/activity T-shirts at $25 each. Food cost you $85 per week but you lived at home for seventeen weeks during the year (so “had” to buy for 35 weeks). Finally, each of the 13 pizza “dinners” you were part of this year cost $13.
a.) calculate the CPI for 2021 with 2020 as the base year.
b.) calculate the rate of inflation.
c.) calculate nominal GDP
d.) calculate real GDP
e.) calculate the GDP deflator
a.) 106.05 ((sumof P(new) Q(old))/(sumof P(old) Q(old))x 100
b.) 6.05 (CPInew-CPIold/CPIold)
c.) 3425 (sumof P(new)Q(old))
d.) 3234 (sumof(P(old)Q(new))
e.) 1.059% (nominal/real)
Number 8 on test 1
Go do it :)
What is commercial paper?
270 days or less to maturity, issued by large corporations and banks, and is unsecured.
What are the three functions of money?
Medium of exchange, unit of account, store of value
Explain the government safety net including the ideas of moral hazard and adverse selection. Remember to include issues prior to 1934 when there was no government safety net.
Created by FDIC, FED, OCC.
Prior to 1934, depositors waited for bank liquidation for funds and did not know the quality of bank assets.
After 1934, the FDIC used two approaches: the “payoff” method and :purchase and assumption” method when banks were failing.
There were 3 drawbacks to the safety net - adverse selection (discriminating because of apparent need for help), moral hazard (taking more risk on the depositor side which was not agreed (a loophole)), and the “too big to fail” policy.
Which Act raised the amount of the safety deposit net?
The Dodd-Frank reform act of 2010
What is the FDIC and how much deposits do they cover?
Federal Deposit Insurance Corporation, $250,000 (1/4 mil)
What are the three major rating agencies of corporations’ debt?
Standard and Poor’s, Moody’s, Fitch
Define and explain the meaning of the slope of today’s yield curve (inverted)
The interest rates on short-term bonds are higher than those on long-term bonds
A bank has rate-sensitive assets of $60 million and rate-sensitive liabilities of $30 million. If interest rates rise by 5 percentage points, say from 10 to 15 percent, bank profits (measured using gap analysis) will change by how much?
$1.5 million
What are the Basel Accords?
They monitor/require the set amount of capital held at a bank
What are the 2 types of failure and their meaning?
Illiquidity: no cash
Insolvency: assets < liabilities
If a corporation’s debt is rated AA+ what is it’s grade? If it is rated B+?
Investment-grade, high yield (junk)
Balance sheet - #10 exam 2
Now plz :)
What does the acronym CAMELS mean to the regulation of banking?
Chartering and bank examination. It keeps banks “on track” (Capital adequacy, Asset quality, Management, Earnings, Liquidity, Sensitivity to market risk)
Who is the chair of the Federal Reserve System today?
Jerome Powell
Define repurchase agreement and state if it is a Money Market or Capital Market security.
An agreement where the Fed buys securities with the agreement that the seller will repurchase them within a short period of time (usually 1 - 15 days). This is a money market security.
If the currency to checkable deposit ratio is 12%, the excess reserve to checkable deposit ratio is 13% and the required reserve ratio on demand deposits is 12%, what is the multiple deposit multiplier? If total reserves change by one million dollars, what will be the change in the money supply?
Suppose the Federal Reserve Governors change the required reserve ratio to 10%. What is the multiple deposit multiplier now? What is the change in the money supply now if total reserves change by one million dollars?
3.027, $3,027,000
3.2, $3,200,000
List the 2 advantages and 2 disadvantages to inflation targeting.
Advantages:
Easily understood
Improved performance
Disadvantages:
Delayed signaling
Too much rigidity
List the four advantages of open market operations
Flexible and precise
Easily reversed
Quickly implemented
Controlled by the Fed
List 4 goals of monetary policy
PRIMARY: Price stability
Economic growth
Financial market stability
Full employment
Briefly write out the Taylor rule and state what it is trying to forecast
Fed Funds Target Rate = Inflation rate + equilibrium real fed funds rate + 1/2(inflation gap) + 1/2(output gap)
This automatically sets the target Fed Funds rate.
List the four tools of the Federal Reserve System
Open Market Operations
Discount rate
Interest on excess reserves
Reserve requirements
Do the market for reserves graph!
Also make sure to list how the open market sale affects domestic exchange rate.
Briefly discuss the independence of the Federal Reserve System in the U.S.A.
Argument FOR:
- Protects Fed against political pressures
- Too important to hand to politicians
- Would have to finance a large budget deficit if not independent
Argument AGAINST:
- Undemocratic
- Unaccountable
- Difficult to coordinate monetary and fiscal policy
Fed gets its revenue from government securities
List 4 functions of the Federal Reserve District Banks
- Issues new currencies
- Withdraws damaged currencies
- Clears checks
- Collects data on local business conditions
Where are the required reserves for Flagstaff banks kept
San Francisco Federal Reserve Bank
