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
If Change in M/M is greater than change in Y/Y then
Change in inflation \> 0
26
Deflation leads to:
Households postpone spending Rising real interest rates Rising debt burdens
27
Hoarding money =\>
deflation
28
Austerity =\>
stagnation/deflation
29
Deflation =\>
lower wages =\> rising debt burdens
30
Taylor rule
A rule developed by John Taylor that links the Fed's target for the federal funds rate to economic variables
31
Inflation targeting
Conducting monetary policy so as to commit the central bank to achieving a publicly announced inflation
32
What is the Velocity of money
The rate of money turnover link between M & PY
33
Short run Phillips Curve is not \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
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
QE-2 statement
The open market trading desk will continue to reinvest principle payments from **agency debt** and **agency MBS** ($300 billion over next 8 months)
35
QE2 Financial Effects:
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
Nominal interest rates =
real interest rates + inflation expectations
37
QE2 Real Economy Effects
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
QE-2 Costs/risks
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
Monetary policy options to prevent deflation and increase inflation expectations
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
Anticipated inflation is \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_; Unanticipated inflation is \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
expected and built into planning unexpected and disrupts planning
41
Unanticipated inflation outcomes:
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
Borken Investment Banking Model
Deregulation + Leverage + Mortgage Securitization + Falling Home prices
43
Mortgage Securitzation
Seperationf of loan organization from loan holder
44
Assets: investment banks
MBS/ABS/CDO/ CLOs -illiquid, long-term
45
Liabilties + capital: investment banks
Wholesale funding base - commercial paper - repurchase agreements (unstable, non-insured, short term)
46
Credit crunch factors
Subprime/jumbo mortgage default concerns Balance sheet asymmetric information Weakening economy
47
Between 2006 to 2008, funds \_\_\_\_\_\_\_\_\_
dried up
48
Washington Maxim:
Temporary solution =\> Permanent fixture
49
Repurchase Agreements | (Repo)
Sale and purchase of securities agreement
50
Repo =
Cash transaction + Forward agreement
51
Reverse Repo:
Fed initially drains reserves Adds reserves back later Used to target i
52
Repo facts:
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
Why are exchange rates important?
Because they affect the relative price of domestic and foreign goods
54
Currency appreciates =\>
country's good prices increase abroad =\> foreign good prices decrease in that country
55
If currency appreciates, two points:
1. Makes domestic businesses less competitive 2. Benefits domestic consumers
56
If PPP holds, then no \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
arbitrage profit opportunities
57
If not PPP, then \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
arbitrage profit opportunities exist
58
Purchasing power parity
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
Dollars and gold are \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
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
J.M Keynes viewpoints
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
F.A. Hayek viewpoints
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