MonPol Reviewer Flashcards
When the interest rates are falling the exchange rate moves in the same
direction as the industry so the price of exports.
Exchange Rate Channel
Troubles at one institution cause it to sell off assets, driving down the
prices of assets held by other institutions
Fire Sale
It means the rates of interest you’ll get if you go in to any commercial bank. Affected by many policy instruments like
reserve rate, repurchase agreements and treasury bills.
Market Rates
It takes for the authorities to observe changes in the
economy and to decide on a change in the official short-term rate of
interest
Policy Decision Lag
3 forms of Monetary Policy Change:
Interest Rate Control
Monetary Base Control
Direct Control
Process of getting saving into productive investment. These are the markets and institutions that do this. Include banks, investment banks, money market, mutual funds, pension funds. etc.
Financial Intermediation
A change in the monetary base in the
expectation that this will alter the money supply, or its rate of growth
Monetary Base Control
Equity and bond prices respond to new information about term
structure of discount rates, real growth prospects, and inflation
prospects. House and other property prices adjust (maybe slowly) to new borrowing costs.
Asset Prices Channel
A belief that the institution is in danger of becoming insolvent can cause depositors to _________ their funds and lenders to stop lending.
withdraw
less likely to either stop spending
if the interest rate is falling or they are less likely to not spend if they
say the interest rate is rising.
Expectation / Confidence Channel
Defaults and _____ in asset values can reduce the _____ of an institutions loans and securities.
change, value
Transmission Channels (4)
Market Interest Rate Channel
Asset Prices Channel
Expectation / Confidence Channel
Exchange Rate Channel
Effects of a Financial Crisis on PAE: All of these developments are likely to ________ PAE at a given level of Y.
reduce
A number of financial institutions are in danger of failing ang people lose confidence.
Financial Crisis
Possible policies to prevent financial crises: Regulation of risk-taking by financial institutions and _______ among financial institutions.
linkages
It takes for the change in the official rate to feed
through to other interest rates in the economy
Institutional Lag
Needed for changes in expenditure to be reflected
in changes in the rate of inflation, output, and employment.
Real Response
Possible policies to prevent financial crises:
D_______ I______
Deposit Insurance
A change in the short-term rate of interest at
which the central bank is willing to lend to the banking sector in order to
relieve any shortages of liquidity within the monetary system
Interest Rate Control
If the value of the loans and securities falls to the point where they are worth less than the institutions’ obligations to its depositors and lenders, the institution is _______.
Insolvent
The series of links between the monetary policy change and the changes in
output, employment and inflation
Transmission Mechanism of Monetary Policy
Possible policies to prevent financial crises: HIgher _____ requirements for financial institutions.
Capital
Possible policies to prevent financial crises: Using monetary and ________ ________ to keep the economy stable.
fiscal policy
Tima Lags of Monetary Policy (5)
Policy Decision Lag
Institutional Lag
Income Lag
Expenditure Lag
Real Response Lag
Troubles at one institution directly harm other institutions because of
loans, insurance contracts, and other direct links among them.
Linkage
Changes in the regulations that apply to banks in an
attempt to influence the rate of growth of their lending
Direct Control
required for interest rate changes to affect the disposable
income of households
Income Lag
Effects of a Financial Crisis on PAE: It may raise _______ standards or otherwise reduce the _______ of loans.
lending, availability
Required for changes in short-term and long-term
interest rates to affect the expenditure of households and firms
Expenditure Lag
Effects of a Financial Crisis on PAE: It may harm consumer and firm ________.
Confidence
Troubles at one institution reduce PAE and hence Y, and so
harm other institution
Macroeconomic
people expect
inflation to rise, they just turn spending behavior accordingly
Rational Expectations Theory
Policy actions and policy announcements have effects on expectations of future
growth in real activity and inflation.
Expectation / Confidence Channel
confidence to the markets and people’s
expectations of what’s going on in the markets are also given
confidence and assurance.
Forward Guidance
As interest rates go up probably the number of mortgage approvals would fail
and so the demand for housing would probably settle down a little bit and so
asset prices would also start to fall.
Asset Prices Channel
Troubles at one institution create doubts about the health of
other institutions, even if there are no connections between them
Confidence
Contagion of Crises across Financial Institutions (4)
Confidence
Linkage
Fire Sale
Macroeconomic
Effects of a Financial Crises on PAE: It raises ________ spreads.
credit
Used to pay for purchases and store wealth.
Has changed from gold/silver coins to paper currency to electronic funds.
Money
6 Parts of Financial System
Money
Financial Instruments
Financial Markets
Financial Institutions
Government Regulatory Agencies
Central Banks
Transfer resources from savers to investors and to transfer risk to those best equipped to bear it.
Financial Instruments
Buy and sell financial instruments. Organized markets were created, like the New York Stock Exchange. Now transactions are mostly handled by electronic markets
Financial Markets
Provide access to financial markets, collect information and provide services. It offers a huge assortment of financial products and services.
Financial Institutions
Provide oversight for financial system. Provide wide-ranging financial regulation - rules and supervision.
Government Regulatory Agencies
Monitor financial institutions and stabilize the economy. Began as large private banks to finance wars
Central Banks
Control the availability of money and credit to ensure low inflation, high growth, and stability of financial system.
Central Banks
5 Core Principles of Money and Banking
Time
Risk
Information
Markets
Stability
_____ has value.
Affects the value of financial instruments
Time
_______ is paid to compensate the lenders for the time the borrowers have their money
Interest
________ requires compensation.
Higher the _____, the bigger the payment
Risk
________ is the basis for decisions.
The more important the decision, the more ______ we gather.
Information
________ and ________ of information is the foundation of the financial system
Collection, Processing
________ determine prices and allocate resources. COre of the economic system.
Markets
________ improves welfare.
Stability
_______ ________ reduces risk and improves everyone’s welfare.
Gorws faster than an unstable one.
Stable Economy
generally used to mean any sustained or continuing increase in price. A universal experience.
Inflation
Economic plas and policies are intended to ______ the standards living of people.
Improve
Negates the economic objective of improving the quality of life of people
Inflation
Inflation Losers
Fixed incomes
Pensioners
Creditors
People who have _____ _____ are severely affected during inflation. With increase prices, people who belong to this group would lose out.
Fixed Incomes
Increased prices benefit of ______ from SSS/GSIS would result in a net loss.
Pensioners
Inflation Losers. Fixed amount of principal and interest they lent out would now be valued less.
Creditors
Inflation Gainers:
Flexible Income
Speculator
Debtors
Inflation Gainers: as long there are demand for a product, their product would be sold.
Flexible Incomes
These are the perceptive and lucky individuals are able to buy good at cheaper prices and then sell them later at a higher price.
Speculator
______ usually borrwed before inflation would now have more value.
Debtors
Types of Inflation (2)
Demand Pull Inflation
Cost-Push Inflation
It is said to be if those who buys good and service desire to purchase goods greater than what the economy can produce
Demand Pull Inflation
Type of inflation where increases in the costs of production push prices up
Cost-Push Inflation
Measurement of Price Increases (3)
Consumer Price Index (CPI)
Retail Price Index (RPI)
Wholesale Price Index (WPI)
Most popular and the most used measure as it reflects what happens to the living standards of the consumers.
Consumer Price Index (CPI)
It is intended to provide a general measure of average monthly and annual changes in the retail prices of commodities commonly bought by the consumers, covering all income households.
Consumer Price Index (CPI)
Designed to measure monthly changes of the prices at which retailers dispose of their goods to consumers and end-users.
Retial Price Index (RPI)
Measures monthly changes in the general price level of commodities that flow into wholesale trade intermediaries.
Wholesale Price Indec (WPI)
It is a statistical measure designed to show changes in a variable or group of related variables.
Index Number
Simplest kinds of index numbers are called relatives: (3)
Price Relative (PR)
Quantity Relative (QR)
Value Relative (VR)
3 Types of Price Index (3)
Price Relative
Unweighted Price Index
Weighted Price index
simplest type because they compare the price, quantity, or value of only one commodity between two time periods or localities.
Price Relative
Price Relative (3)
Price Relative PR = Pn/Po
Quantity Relative QR = Qn/Qo
Value Relative VR = (PR) x (QR)
Unweighted Price Index (2)
Simple Aggregate Price Index (SAPI) SAPI = Z Pn / Z Po
Average Price Relatives (APR)
APR = z Pn/Po1 + Pn/Po2 + …. Pn/Pox / N
Weighted Price Index (2)
Laspeyres Index
L.I. = Z (PnQo) / Z (PoQo)
Paasche Index
P.I. = Z (PnQn) / Z (PoQn)
