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Financial Economics > Final Exam Vocab > Flashcards

Final Exam Vocab Flashcards

1
Q

Open Market Operations

A

the purchase and sale of government securities that affect both interest rates and amount of reserves in the banking system

  • purchase: purchase of bonds by Fed
  • sale: sale of bonds by the Fed
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2
Q

Federal Funds Rate

A

Interest rate on overnight loans from one bank to another

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3
Q

Tightening of Monetary Policy

A

A rise in the Federal Funds Rate

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4
Q

Easing of Monetary Policy

A

a lowering of the Federal Funds Rate

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5
Q

Instrument Independence

A

ability of the central bank to set monetary policy instruments (FED= yes)

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6
Q

Goal Indepedence

A

ability of the central bank to set the goals of monetary policy (FED= yes)

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7
Q

Political Business Cycle

A

Just before an election, expansionary policies are pursued to lower unemployment and interest rates. After the election, the bad effects of these policies (high inflation and interest rates), requiring contractionary policies.
- case for Fed independence

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8
Q

Monetary Base

A

US Treasury’s Monetary Liabilities (coins) + Federal Reserves Monetary Liabilities (currency in circulation and reserves)

  • ignore T’s ML
  • also called “High Powered Money”
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9
Q

Reserves

A

deposits at the Fed + currency that is physically held by banks- vault cash
- required reserves + excess reserves

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10
Q

Discount Rate

A

interest rate charged to banking institutions for loans during normal times

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11
Q

Nonborrowed Monetary Base

A
  • results primarily from Open Market Operations
  • Fed controls
  • the monetary base- borrowings from Fed
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12
Q

Borrowed Reserves

A

A bank’s borrowings of the Fed

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13
Q

Multiple Deposit Creation

A

The process by which the Fed supplies the banking system with $1 of additional reserves, deposits increase by a multiple of this amount

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14
Q

Simple Deposit Multiplier

A

the multiple increase in deposits generated from an increase in the banking system’s reserves
- the reciprocal of the required reserve ratio= (1/rr)*change in reserves

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15
Q

Money Multiplier

A

(1+c)/ (rr+ e + c)

  • c= currency ratio set by depositors
  • e = excess reserves ratio set by banks
  • rr = required reserve ratio set by Fed
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16
Q

Dynamic Open Market Operations

A

intended to change the level of reserves and monetary base

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17
Q

Defensive Open Market Operations

A

intended to offset movements in other factors that affect reserves and the monetary base

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18
Q

Primary Dealers

A

specific set of dealers in government securities through which open market operations are conducted

19
Q

Repurchase Agreement (REPO)

A
  • the Fed purchases securities with an agreement that the seller will repurchase them in a short period of time (1-15 days)
  • temporary Open Market Purchase
  • Defensive action
20
Q

Matched Sale-Purchase Transaction (Reverse REPO)

A
  • Fed sells securities and buyer agrees to sell them back to the Fed in the near future
21
Q

Discount Window

A

facility at which banks can borrow reserves from the Federal Reserve

22
Q

Standing Lending Facility

A

primary credit facility where healthy banks are allowed to borrow all they want at very short maturities

  • higher than Federal Funds Rate
  • back up source of liquidity for sound banks
23
Q

Secondary Credit

A

Fed’s discount window credit given to banks that are in financial trouble and are experiencing severe liquidity problems
- higher penalty rate than Federal Funds Rate

24
Q

Lender of Last Resort

A

prevent bank failures from spinning out of control, provides reserves to banks when no one else will

25
Q

Zero-Lower Bound Problem

A

the central bank in unable to lower short-term interest rates further because they have hit a floor of zero
- ppl can always earn more from holding bonds than holding cash, nominal IR cannot be negative

26
Q

Quantitative Easing

A

Expansion of the Balance Sheet, leads to huge increase in MB

27
Q

Credit Easing

A

Altering the composition of the Fed’s balance sheet in order to improve the functioning of particular segments of credit markets

28
Q

Price Stability

A

low and stable inflation

29
Q

Nominal Anchor

A

a nominal variable such as the inflation rate or the money supply

  • ties down the price level to achieve price stability
  • used in monetary policy
30
Q

Time Inconsistency Problem

A

occurs when monetary policymakers conduct monetary policy in a discretionary way and pursue expansionary policies that are attractive in the short run but lead to bad long run outcomes

31
Q

Natural Rate of Unemployment

A

demand for labor equals supply of labor

32
Q

Natural Rate of Output/ Potential Output

A

a level of output produced at the natural rate of unemployment

33
Q

Hierarchical Mandates

A

put the goal of price stability first, then say as long as it is achieved other goals can be pursued

34
Q

Dual Mandate

A

central bank must pursue two equal coequal objectives: price stability and maximum employment

35
Q

Inflation Targeting

A

1) public announcement of medium-term targets for inflation
2) institutional commitment to price stability as primary, LR goal of monetary policy
3) an information-inclusive approach in which many variable are used in decision-making process
4) increased transparency of MP, communication
5) increased accountability of central bank for attaining inflation objectives

36
Q

Macroprudential Regulation

A

regulatory policy to affect what is happening in credit markets in the aggregate

37
Q

Policy Instrument (“Operating Instrument”)

A

a variable that responds to the central bank’s tools and indicates the stance of monetary policy

38
Q

Intermediate Target

A

Intermediate targets that stand between the policy instrument and goals of the Monetary policy
- M2, L-term interest rates

39
Q

Exchange Rate

A

Price of one currency in terms of another

40
Q

Spot Transactions

A

immediate exchange of bank deposits

41
Q

Forward Transactions

A

exchange of bank deposits at some specified future date

42
Q

Law of One Price

A

If two countries produce an identical good, transportation costs and trade barriers are very low, price of the good should be the same throughout the world no matter what country produces

43
Q

Theory of Purchasing Power Parity

A

Exchanges rates between any two currencies will adjust to reflect changes in the price levels of the two countries
- application of law of one price to national price levels

44
Q

Real Exchange Rate

A

the rate at which domestic goods can be exchanged for foreign goods
- the price of domestic goods relative to the price of foreign goods denominated in domestic currency

Financial Economics (6 decks)

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