Unit 9 Flashcards
When the Federal Open Market Committee (FOMC) directs that Treasury securities be purchased in the open market, this will do which of the following?
Lower interest rates on loans to consumers
When the FOMC directs that Treasury securities be purchased in the open market, this will loosen the money supply; securities come out of the economy and money goes in to the economy. More money available lowers interest rates to consumers.
Seacoast Securities, a FINRA member firm and a large corporation, needs to secure funds to cover customers’ margin purchases. Seacoast reaches an agreement to borrow from a large money-center bank for a loan that the bank can terminate with 24 hours’ notice. The rate that the bank charges Seacoast for this loans is called
the broker call loan rate.
A broker-dealer borrows funds to use in margin purchases at the broker call loan rate, and these loans may be called with a one-day notice. The use of the funds classifies this as a broker call loan. Seacoast may borrow for other purposes at the prime rate, but not for this activity.
What is the formula for calculating working capital?
Working capital = current assets – current liabilities.
Which benchmark interest rate indicates the direction of the Federal Reserve Board’s monetary policy?
the discount rate
The discount rate, being the rate the Federal Reserve Bank (FRB) charges for short-term loans to its member banks, is generally considered a good indication of the FRBs policy to either tighten or loosen its hold on the amount of money available to banks for lending to consumers.
Industries that tend to be highly sensitive to inflation, deflation and the ups and downs of business trends would best be described as
Cyclical industries.
Cyclical industries are highly sensitive to business cycles (the ups and downs of business trends) and inflationary or deflationary trends. Most cyclical industries produce durable goods, such as heavy machinery, or material such as steel to be utilized by other industries like the automobile industry. Demand for such goods increases when we are in periods of prosperity but during recessions, the demand for such products declines as manufacturers postpone investments in new capital goods and consumers postpone purchases of these goods.
What is a defensive industry? Example?
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What is Keynesian?
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What is a growth industry? Example?
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What is the Federal Funds Rate?
The interest rate negotiated for an uncollateralized overnight loan between two money center banks.
The federal funds rate is the rate commercial money center banks charge each other for an overnight, unsecured (no collateral) loan.
When the US dollar is strong what happens to the balance of trade?
Strong US dollar = FEWER exports, MORE imports
When the dollar is strong, foreign currency buys FEWER U.S. goods. On the other hand, the strong dollar would buy MORE foreign goods.
Weak US dollar = more exports, less imports
When the dollar is weak, foreign currency buys MORE U.S. goods. On the other hand, the weak dollar would buy FEWER foreign goods.
Demand side theory is also known as
Keynesian theory.
John Maynard Keynes (later the first Baron Keynes) wrote the Magnum Opus of demand side theory.
What is Milton Friedman known for?
Milton Friedman is known for his work on Monetarist theory.
Adam Smith is known for
Adam Smith (the invisible hand) is known for a free-market approach.
Art Laffer is what economic side?
Art Laffer leans toward a supply-side approach.
Match the following statement to the best expression: Government should allow market forces to determine prices of all goods and that the federal government should reduce government spending as well as taxes.
Supply-side Economic Theory
What is supply side economic theory?
Supply-side economics holds that governments should allow market forces to determine prices of all goods. Supply-side adherents judge that the federal government should decrease government spending and taxes. In this way, sellers of goods will price them at a rate that allows them to meet market demand and still sell them profitably.
A weak U.S. dollar leads to more
U.S. exports and a balance of payments surplus.
When the dollar is weak relative to other currencies, it makes U.S. goods more affordable for foreign consumers to buy, so U.S. exports increase. As more goods flow out of the U.S., more money flows in—surplus.
Tiny Cars, Inc., manufactures very small cars and trucks that get really good gas mileage. Their best seller is a small truck that is popular with businesses that use them as delivery vehicles. Tiny Cars is likely which kind of company?
Cyclical company
Tiny Cars is a cyclical company whose sales will likely decline as business slows, and recover as the economy grows.
In what order do the following economic phases typically occur? (Recovery,Trough,Decline,Prosperity)
Recovery, Prosperity, Decline, Trough
Expansion (recovery) is considered to be the beginning of the business cycle, followed by the peak (prosperity), contraction (decline), and trough.
What is supply side approach to fiscal policy sometimes known as?
Trickle-down economics
A supply-side approach to fiscal policy will use all of these tools except (Providing tax credits to small businesses, decreasing government regulatory costs, decreasing tax rates on business entities, personal income tax rebates)
Personal Income Tax Rebates
Supply-side fiscal policy seeks to create a better environment for business to thrive. The end goal is a growing economy that creates jobs. Sometimes called trickle-down economics, the emphasis is on the business side much more than the consumer side.
What is a growth company stock?
Common shares in companies that retain earnings and pays little or no dividends
Most every industry passes through phases; introduction, growth, maturity, and decline. An industry is in its growth phase if it is growing faster than the economy as a whole due to e.g. technological changes, new products, or changing consumer tastes. Because growth companies retain nearly all of their earnings to finance business expansion, growth stocks pay little or no dividends.
Deflation is
book: “deflation is a general decline in prices. Deflation usually occurs during severe recessions when unemployment is on the rise”
Deflation is when consumer and asset prices decrease over time, and purchasing power increases. Essentially, you can buy more goods or services tomorrow with the same amount of money you have today. This is the mirror image of inflation, which is the gradual increase in prices across the economy.
While deflation may seem like a good thing, it can signal an impending recession and hard economic times. When people feel prices are headed down, they delay purchases in the hopes that they can buy things for less at a later date. But lower spending leads to less income for producers, which can lead to unemployment and higher interest rates.
This negative feedback loop generates higher unemployment, even lower prices and even less spending. In short, deflation leads to more deflation. Throughout most of U.S. history, periods of deflation usually go hand in hand with severe economic downturns.
Deflation occurs during
a depression, coinciding with an economic trough in the business cycle.
Deflationary periods in the economy are most associated with severe recessions. Recessions occur during periods of economic contraction in the business cycle.
Recession vs Depression
A recession is a significant, widespread, and prolonged downturn in economic activity. A common rule of thumb is that two consecutive quarters of negative gross domestic product (GDP) growth mean recession, but many use more complex measures to decide if the economy is in recession.
I think a depression is six consecutive quarters of negative GDP.
Tighter credit will
slow economic expansion, preventing inflation.
Tighter credit means that there is less money available to lend to consumers. Less money available to lend means less consumer spending, which will slow economic growth, and helps prevent or slow
.
The flow of money between the United States and other countries is known as
the balance of trade.
The balance of payments represents the flow of money between the United States and other countries.
What is money supply?
The money supply is the sum total of all of the currency and other liquid assets in a country’s economy on the date measured. The money supply includes all cash in circulation and all bank deposits that the account holder can easily convert to cash.
What distinct numbers of the nation’s money supply are tracked by the Federal Reserve?
M1, M2
The Federal Reserve tracks two distinct numbers on the nation’s money supply and labels them M1 and M2. Each category includes or excludes specific kinds of money. There is yet another number, the M3, but its reporting was discontinued by the Fed in 2006.
There’s also an MO and an MB, but these are generally included in the main categories rather than being reportedly separately.
All of the categories are an accounting of the amount of cash in the economy, but each category has a slightly different definition of “cash,” or liquid assets.
What is M1
M1, also called narrow money, is often synonymous with “money supply” in reports from the financial media. This is a count of all of the notes and coins that are in circulation, whether they’re in someone’s wallet or in a bank teller’s drawer, plus other money equivalents that can be converted easily to cash. A regular bank savings account, for example, is a money equivalent. The account holder can convert those savings to cash at any time and instantly.
What is M2
M2 includes M1 plus short-term time deposits in banks and money market funds.
Generally, less than a year is considered short-term.
What is the difference between M0, M1, M2?
The U.S. money supply is reported in two main categories, M1 and M2. MO is included in both M1 and M2.
MO is the total amount of paper money and coins in circulation, plus the current amount of central bank reserves.
M1 is the most frequently reported headline number. It is MO plus money held in regular savings accounts and in travelers’ checks.
M2 is all of M1 plus money invested in short-term assets that mature in less than a year, like some certificates of deposit.
In order to calculate the earnings per share you would need information from
Earnings per share (EPS) is earning available to the common shareholder (from the income statement) divided by the number of outstanding shares (found in the net worth section of the balance sheet). The stock’s current market value is not used in the calculation.
The largest component of the U.S. balance of payments is
the balance of payments
U.S. imports and exports are the components used to calculate the balance of trade. The balance of trade is the measure of those two components against each other—the net being either more money coming into or going out of the U.S. economy. That measure, the balance of trade, is the largest component of the U.S. balance of payments.
Federal Reserve member banks needing to borrow money can borrow from who and at what rates?
Need to check Kaplan book ???
Federal Reserve member banks needing to borrow have two resources:
1.) Federal Reserve Bank itself, which will lend to them at the discount rate.
2.) Other member banks, who will lend to one another at the federal funds rate.
What is the discount rate?
Check Kaplan ???
The rate at which The Federal Reserve Bank itself will lend to Federal Reserve member banks needing to borrow money.
What is the Federal Funds Rate?
check Kaplan book ???
Who sets the federal funds rate?
check kaplan book ???
Is the Federal Funds Rate or the Discount Rate higher? by how much in general?
Check Kaplan ???
The discount rate is typically set higher than the federal funds rate target, usually by 100 basis points (1 percentage point), because the central bank prefers that banks borrow from each other so that they continually monitor each other for credit risk and liquidity.
Characteristics of the decline phase of the business cycle
Higher consumer debt, rising inventories, and increasing defaults, decreased industrial production
It would be reasonable to expect an increase in exports from the United States if what occurred?
U.S. exports should increase when foreigners have greater purchasing power. That occurs when their currency is stronger than the dollar.
In what part of the money supply are large time deposits of more than $100,000 considered to be found?
M3 is where time deposits of more than $100,000 and repurchase agreements with terms longer than one day are found.
What is a leading indicator?
A leading indicator are those that tend to change direction ahead of the overall economy.
The change in direction may lead the economy by a very long time frame (months) to a very short time frame (weeks), but it has proven to be reliable.
What type of indicator is outstanding commercial and industrial loans?
Lagging indicator
What type of indicator is corporate profit?
Lagging indicator
What type of indicator is personal income?
coincident indicator
What type of indicator is labor cost per unit of output?
lagging indicator
The principles of demand-side theory were laid out in the 1936 book, The General Theory of Employment, Interest, and Money written by who?
John Maynard Keynes
What does fiscal policy refer to?
Fiscal policy refers to governmental budget decisions enacted by the president and Congress to regulate federal spending and taxation.
What does monetary policy refer to?
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