PART I: Chapter 4 - Economics Flashcards
What defines a recession?
Negative GDP growth for 6 consecutive months.
What defines a Recovery?
Positive GDP growth for 6 consecutive months.
What is a Depression?
12-months of negative GDP growth
Would the Fed tighten or loosen the money supply to combat inflation?
How would they go this?
What type of security is most often sold by the FOMC?
Tighten
Increase interest rates and sell government securities.
T-Bills
What do prices and interest rates do in a Deflationary period?
Decline in prices and interest rates.
What is GDP?
What is it a measure of?
Total value of all goods and services produced within the US.
Economic growth.
What is the Producer Price Index?
The MONTHLY change in wholesale prices to industry (i.e. food, lumber, oil, etc.)
What is the Consumer Price Index?
What is CPI also known as?
What is CPI used to measure?
The change in prices of common consumer goods.
Cost of Living Index
Inflation
What’s the difference between Disposable and Discretionary income?
Disposable is income after taxes.
Discretionary is income after taxes and essentials.
What investment asset best keeps pace with inflation?
What’s the best type of investment during deflation?
Common stock
High quality bonds
What are the 4 stages of the business cycle?
Expansion
Peak
Contraction
Trough
How do Interest rates behave with respect to the Business Cycle?
They parallel it.
What are some Leading Economic Indicators?
SHUPED
- Stock prices
- Housing starts
- Unemployment claims
- Consumer Prices
- Production
- Durable goods (3 or more years – appliances, cars, etc)
What are some Coincident Economic Indicators?
Farm GRIM
- Non-Farm payroll
- GDP
- Retail sales
- Industrial production index
- Manufacturing
What are some Lagging Economic Indicators?
iHUP
- Inventory
- Housing sales
- Unemployment rate
- Prime interest rate
Who manages Monetary policy? Via what?
What does it do?
Federal reserve via the Fed Open Mkt Committee (FOMC).
Manages the flow of money and credit.
What are 5 tools the FOMC uses to manage monetary policy?
Which is least likely? The least effective?
Buy and Sell government securities (aka Open Mkt Ops - most effective)
Reserve requirements (least likely)
Discount rate
Margin (least effective)
Moral Suasion
What are 5 functions of the Federal reserve?
ALAR Last Resort
- Audit member banks
- Loan money
- Agent of the Fed
- Regulate member banks
- Lender of last resort
What is Fiscal Policy?
Who manages it?
What tools do they use?
Government management of the economy.
Congress
Government spending, taxes, and welfare.
Define the 5 different banking rates?
Prime: What banks lend to their best customers (highest of all these).
Federal Funds: what member banks lend to each other.
Discount: Fed SETS and lends to member banks.
LIBOR: what international banks charge each other.
Broker / Call: what broker/dealers borrow at to cover customer loans.
How does US dollar depreciation and appreciation effect imports and exports?
Based on the above, what kind of relationship does the value of the dollar and imports/exports have?
EXAMPLE: If the US dollar is weak compared to the Euro, would the dollar be higher or lower than the Euro?
Depreciation: Imports ↓ Exports ↑
Appreciation: Imports ↑ Exports ↓
Inverse relationship
Higher, For example: Euro = 1.00 / US Dollar = 1.10
- this means it would take $1.10 to equal 1 Euro
What does the Foreign Exchange rate measure?
The price of one currency compared to another.
Do rising interest rates increase or decrease the value of the dollar?
Do they increase or decrease investment in the US?
Increase
increase
What does the International Monetary Fund do?
Promote stability in international trade.
