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zMacroeconomics > Powerpoints > Flashcards

Powerpoints Flashcards

1
Q

Assets (Bank Balance Sheet)

A

Reserves (Vault cash/Fed deps)

Investments

Loans (consumer, business, student)

Building

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2
Q

Liabilities + NW (Balance Sheet)

A

Deposits (Checking Deposits Savings MMDA CDs IRAs)

Borrowings

Net worth

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3
Q

T-Account shows what?

A

Shows change in balance sheet

Loans on left; Deposits on right

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4
Q

Lent Funds to Borrowers

A

Loans (consumer, business, student)

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5
Q

Surplous Funds from Savers

A

Deposits (checking deposits, savings, MMDA, CDs, IRAs)

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6
Q

Assets =

A

Liabilities + NW

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7
Q

Bank Run

A

Many depositors simultaneously decide to withdraw money from a bank

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8
Q

Bank panic

A

Many banks experiencing bank runs at the same time

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9
Q

Fractional reserve banking system

A

A banking system in which banks keep less than 100 percent of deposits as reserves

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10
Q

Monetary policy

A

The actions the Federal Reserve takes to manage the money supply and interest rates to pursue economic objectives

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11
Q

Three monetary policy tools:

A
  1. Open market operations
  2. Discount policy
  3. Reserve requirements
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12
Q

Open market operations

A

The buying and selling of Treasury securities by the Federal Reserve in order to control the money supply

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13
Q

Federal Open Market Committee (FOMC)

A

The Federal Reserve committee responsible for open market operations and managing the money supply

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14
Q

Discount loans

A

Loans the Federal Reserve makes to the banks

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15
Q

Discount rate

A

The interest rate the Federal Reserve charges on discount loans

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16
Q

FED RES assets

A

FX reserves

Treasury bonds

Disc. loans

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17
Q

Fed reserve Liabilties + NW

A

Currency in Circulation

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18
Q

Required Reserves formula =

A

10% x CHK Deposits

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19
Q

Reserves =

A

Required Reserves + Excess Reserves

Vault cash + Deposits at Fed Res

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20
Q

Bank assets

A

Reserves

Treasury bonds

Loans

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21
Q

Bank liabilities + NW

A

CHK deps.

Savings

MMDA

CDs

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22
Q

The act of originating a loan is ___________________

A

the act of creating money

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23
Q

Change in checking deposits =

A

1/r x change in reserves

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24
Q

Equation of Exchange

A

M x V = P x Y

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25
Q

If Change in M/M is greater than change in Y/Y then

A

Change in inflation > 0

26
Q

Deflation leads to:

A

Households postpone spending

Rising real interest rates

Rising debt burdens

27
Q

Hoarding money =>

A

deflation

28
Q

Austerity =>

A

stagnation/deflation

29
Q

Deflation =>

A

lower wages => rising debt burdens

30
Q

Taylor rule

A

A rule developed by John Taylor that links the Fed’s target for the federal funds rate to economic variables

31
Q

Inflation targeting

A

Conducting monetary policy so as to commit the central bank to achieving a publicly announced inflation

32
Q

What is the Velocity of money

A

The rate of money turnover

link between M & PY

33
Q

Short run Phillips Curve is not ________________________

A

a structural economic relationship

not a permanent long-run tradeoff

not a reliable menu of change in inflation & U.R. combinations in the long run

34
Q

QE-2 statement

A

The open market trading desk will continue to reinvest principle payments from agency debt and agency MBS ($300 billion over next 8 months)

35
Q

QE2 Financial Effects:

A
  1. Lower nominal interest rates (Treasury, corporate, mortgage) if the fall in real interest rates exceeds the rise in inflation expectations
  2. Lower real interest rates
  3. Lower dollar exchange rate
  4. higher stock prices
  5. higher inflation expectations
36
Q

Nominal interest rates =

A

real interest rates + inflation expectations

37
Q

QE2 Real Economy Effects

A

Additional 2011 economic growth of 0.6%

Additional 2011 job growth of 500,000

Lower 2011 unemployment rate by 0.4 percentage points

Debt refinancings will lower debt burdens and repair households and firms balance sheets

Rising exports

Chase investors into riskier assets

Higher stock prices will encourage additional business capital expenditures and hirings

Higher stock prices will boost household net worth, reducing savings rates and boosting consumption spending

Lower corporate risk premium => increase capital formation => job creation

Rising inflation => rising nominal returns on investment

Rising inflation expectations => boost consumption spending today at the expense of future consumption

Rising inflation expectations => falling real interest rates => rising consumer spending and business investment

38
Q

QE-2 Costs/risks

A

May send signal to investors the Fed is panicking
The Fed is “pushing on a string” as demonstrated by the large holdings of excess reserves
Fed is monetizing the additional Treasury debt through June 2011
Low U.S. yields will chase capital abroad, appreciate foreign currencies, create global economic distortions. For example, asset price bubbles and excess accumulation of reserves.
QE2 will not significantly lower nominal interest rates: lower real interest rates will be offset by higher inflation expectations.
Falling dollar will decrease the Chinese Yuan because of its peg.
Low interest rates are suppose to mobilize resources, but it could misallocate resources.
Low interest rates may boost the economy today, only to collapse it tomorrow.
Low interest rates subsidize borrowers at the expense of savers.
Competitive Quantitative Easing – Countries competing by printing more money to reduce exchange rates. This is inherently unstable. Someone must lose share of world trade at expense of others who gain share.
Trade Wars – Boosting export strategy can turn into blocking imports policy
Gold bubble
QE-2 won’t work because households and firms are repairing and deleveraging their balance sheets.
Firm’s cash stock piles are at record levels
Fed’s determination to avoid deflation could actually cause deflation: ELEP is a sign the Fed expects underemployed resources for an “extended period” => private sector pessimism => business expect investments to fail and households expect falling prices => cash hoarding => weak economy => deflation.

39
Q

Monetary policy options to prevent deflation and increase inflation expectations

A
  1. Quantitative easing: print money to buy long-term government debt
  2. Buy private-sector debt
  3. Change expectations by announcing it will keep short-term rates low for a long time
  4. Raise its long-run inflation target
    (encourage borrowing, discourage cash hoarding)
  5. Reduce the interest rate paid on excess reserves.
  6. Move from inflation targeting (rate of change) to price level targeting
40
Q

Anticipated inflation is __________________; Unanticipated inflation is __________________

A

expected and built into planning

unexpected and disrupts planning

41
Q

Unanticipated inflation outcomes:

A

Alters expected outcome of long-term projects

Reduces long-term investment

Distorts the information in prices — reduces the effectiveness of markets

Results in actions based on price anticipation, instead of production

42
Q

Borken Investment Banking Model

A

Deregulation + Leverage + Mortgage Securitization + Falling Home prices

43
Q

Mortgage Securitzation

A

Seperationf of loan organization from loan holder

44
Q

Assets: investment banks

A

MBS/ABS/CDO/ CLOs

-illiquid, long-term

45
Q

Liabilties + capital: investment banks

A

Wholesale funding base

  • commercial paper
  • repurchase agreements

(unstable, non-insured, short term)

46
Q

Credit crunch factors

A

Subprime/jumbo mortgage default concerns

Balance sheet asymmetric information

Weakening economy

47
Q

Between 2006 to 2008, funds _________

A

dried up

48
Q

Washington Maxim:

A

Temporary solution => Permanent fixture

49
Q

Repurchase Agreements

(Repo)

A

Sale and purchase of securities agreement

50
Q

Repo =

A

Cash transaction + Forward agreement

51
Q

Reverse Repo:

A

Fed initially drains reserves

Adds reserves back later

Used to target i

52
Q

Repo facts:

A

Repos began in 1917 by Fed to lend to banks

$5 trillion Repo market today

Secured cash loan

Legal transfer of security to lender

Repurchase prices > original prices (gap=interest)

1-7 day term typically, up to 2 years

Typically over collateralized to mitigate credit risk

Fede describes transaction from the counterparty’s viewpoint, rather than from their own

53
Q

Why are exchange rates important?

A

Because they affect the relative price of domestic and foreign goods

54
Q

Currency appreciates =>

A

country’s good prices increase abroad => foreign good prices decrease in that country

55
Q

If currency appreciates, two points:

A
  1. Makes domestic businesses less competitive
  2. Benefits domestic consumers
56
Q

If PPP holds, then no ____________________

A

arbitrage profit opportunities

57
Q

If not PPP, then _______________

A

arbitrage profit opportunities exist

58
Q

Purchasing power parity

A

E (exchange rate) will adjust so that it is possible to buy the same market basket of G/S with the equivalent amount of any country’s currency

59
Q

Dollars and gold are _________________

A

currency substitutes

  • both serve as a store of value
  • a fall or expected fall in the value of the dollar create incentives to shift towards gold
60
Q

J.M Keynes viewpoints

A

Advocated the use of fiscal and monetary measures to offset recessions

AD determines the overall level of economic activity

The modern capitalist economy does not automatically work at top efficiency, but can be raised to that level by government intervention

61
Q

F.A. Hayek viewpoints

A

Changing prices communicate signals to enable individuals to coordinate their plans. This lead to an efficient exchange and use of resources

Leading critic of collectivism/socialism because it required a central planner that would eventually become totalitarianism

The free price system is a spontaneous order- the result of human action, but not of human design

Central banks do not possess the relevant info to govern the money supply, nor the ability to use it correctly

62
Q
A

zMacroeconomics (26 decks)

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