54 terms

Chapter 18

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Terms in this set (...)

What is the order of the phases of the business cycle?
Expansion ; Peak ; Recession ; Trough
Do all of the phases in the business cycle last the same?
No, they all may operate within different time lots
What is inflation?
General rise in the level of prices
What are two key measurements of inflation?
The Consumer Price Index (CPI), and the Producer Price Index (PPI)
What is a recession?
General contraction in economic activity. Declining Gross Domestic Product
What is GDP (Gross Domestic Product)
The value of all goods and services produced within the U.S. It does not include the value of goods and services produced by U.S. citizens or companies located outside of the U.S.
When is it said that a recession has started?
When there are two consecutive quarters of declining GDP
What is a severe depression also called?
A severe recession
During a recession, there is a general decline in:
Economic activity
Disinflation refers to a
Reduction in the rate of inflation
Do interest rates decline in a recession?
Interest rates would be expected to decline in a recession as the decline in economic activity reduces the demand for capital
Which investment products could potentially provide a customer with an inflation hedge?
Variable insurance / annuity products or precious metal funds
What is the Keynesian Economic Theory?
John Maynard Keynes emphasizes the role of government in influencing the economy. The government exerts this influence through fiscal policy which refers to government spending and taxation.
Who is fiscal policy controlled by?
Congress, which passes bills that increase or decrease spending and taxes and the president must sign them in order for them to become effective.
Define Monetarism
The theory that the money supply is the key to explaining events like the business cycle. An increase in the money supply that is too rapid results in high inflation as too many dollars are chasing too few goods. A significant decrease in the money supply will result in a recession as banks and other lenders would be forced to charge more ( raise interest rates) for a scarce commodity: money.
Are Monetarists advocates for a slow and steady growth of the money supply?
Yes
Who sets fiscal policy?
Fiscal policy is set by Congress (the legislative branch) and the President (the executive branch)
Who sets Monetary policy?
Monetary policy is set by the Federal Reserve Board
Which of the following describes the correct order of the phases in the business cycle?
A. expansion--recession (contraction)--peak--trough
B. expansion--peak--recession (contraction)--trough
B. Given any phase of the business cycle, you should be able to name the next three phases in order. In this case, the correct order starts with expansion, which is followed by peak, recession and trough
Inflation is defined as
A. a general rise in the level of prices
B. an increase in the general level of interest rates
A. The definition of inflation is a general rise in the level of prices. While interest rates generally rise during an inflationary period, this is an effect of inflation, not the definition.
Monetary policy is set by which of the following?
A. congress and the president
The FRB (federal reserve board)
B. Monetary policy is set by the FRB. Fiscal policy is set by the legislative (congress) and executive (the president) branches of the government.
A person who advocates an increase in government spending as a way to stimulate the economy and end a recession is most likely an advocate of which economy theory?
A. Keynesian
B. Monetarist
A. Keynesians emphasize the role that government spending and tax policy (fiscal policy) plays in controlling the economy. monetarists favor slow, steady growth in the money supply as the path to a healthy economy.
What acts as a central bank in the United States?
The federal reserve (The Fed) which is governed by the federal reserve board.
If a capital asset is held for more then one year it is considered
the holding period is considered long term
If a capital asset is held for less then one year it is considered
the holding period is considered short term
When the supply of money increases
its price--interest rates--will drop
When the supply of money shrinks,
its price--interest rates--will rise
What are tools the Fed uses in order to increase or decrease the money supply?
The reserve requirement
The multiplier effect
The discount rate
Fed Funds
Open Market Operations
What is the fed funds rate set by?
By the laws of supply and demand not the fed
Does the Fed set the fed fund rate?
No, it is set by the laws of supply and demand
What tool is the most frequently used by the Fed?
Open market operations
Define Open Market Operations
The Fed influences the fed funds rate by buying and selling U.S. Government securities in the open market with a select group of banks and broker dealers called primary dealers.
What is a repurchase agreement?
When the Fed buys securities from an institution agreeing to sell them back in the near future
What happens when the Fed sells government securities in open market operations?
The money supply decreases and interest rates rise
What is the most frequently used monetary policy tool of the Fed?
Open market operations
What happens if the Fed lowers the margin requirements?
This would increase the amount of credit available to purchase securities, thereby lowering interest rates.
Define moral suasion
Speeches by the chairman of the Federal Reserve Board that may have impact on stock prices, bond prices, and interest rates.
What does the reserve requirement tool do?
Amount banks must hold in vault or at the Fed ; to decrease interest rates the Fed lower and to increase interest rates the Fed raise. The multiplier effect makes this tool difficult to use.
What does the Discount rate tool do?
The rate banks pay to borrow from the fed : to decrease interest rates the Fed lowers this rate : to increase interest rates the Fed raises this rate. Banks tend to borrow at discount window only at last resort
What does the Open Market Option tool do?
Government securities transactions with primary dealers; repos and reverses ; to decrease interest rates the Fed buy from dealers and to increase interest rates the Fed sells to dealer. Most frequently used tool of monetary policy
What does the Margin tool do?
Regulates amount of credit available to purchase securities : to decrease interest rates the Fed lowers margin rules ; to increase rates the Fed raises the margin rules. Fed rarely uses this tool, since it is not very effective.
What does the Moral Suasion tool do?
The Fed attempts to influence the market through speeches and statements ; to decrease interest rates the Fed "Talks rate down" and to raise interest rates the Fed talks rates up. Also called "jawboning"
Define the discount rate
The interest rate the Fed charges member banks for short term loans from the discount window
Define Fed funds rate
The interest rate banks charge each other for loans of excess reserves (usually overnight)
Define Prime rate
The interest rate banks charge their best corporate customers for short term loans. like the fed funds rate, this rate is not set directly by the Fed, but is influenced by its monetary policy
Define Call Money Rate
Also called the broker loan rate, it is the interest rate charged by banks on loans to broker-dealers against margin stock collateral
What rate does the Federal Reserve Board set?
The FRB sets only the discount rate
How is the fed funds rate determined?
By market forces
If the Fed wanted interest rates to fall, it would
A. increase the money supply
B. decrease the money supply
A. If the supply of a commodity increases, its price should fall. the money supply I no different. An increase in the money supply will cause its price --interest rates--to fall
In an inflationary environment, the FRB would most likely pursue
A. an easy money policy
B. a tight money policy
B in an inflationary environment, the economy is growing too rapidly. The Fed would pursue a restrictive monetary policy to raise the interest rates and slow the economies growth
The fed fund rate is
A. set by the FRB (federal reserve board)
B. determined by market forces
B. The fed funds rate is determined by the market forces of supply and demand. The FRB sets the discount rate, which is paid by banks wishing to borrow from the Fed's window
Which of the following is the tool most frequently used by the Fed to implement monetary policy?
A. Margin rules
B. Open market options
B. Open market operations are the most commonly used tool of the FRB. Margin requirements are rarely altered
The market in which foreign currency is traded is known as the
A. NYCE (New York Currency Exchange)
B. Interbank market
B. Since most of the trading in currencies takes place between major international banks, it is called the interbank market. Trading occurs over the counter
If the U.S. dollar strengthened
A. foreign goods would be cheaper to purchase for U.S. consumers
B. foreign goods would be more expensive to purchase for U.S. consumer
A. When buying imported good, the purchaser typically pays in the currency of the producing nation. Since fewer dollars would be needed to buy the foreign currency, a strong dollar makes foreign goods cheaper for an American consumer.