Upgrade to remove ads
Only $35.99/year

Oral Exam - Money & Banking

Terms in this set (85)

What is used as the most comprehensive measure of national output in the US?
Real Gross Domestic Product (Real GDP)
2. When one uses "constant prices" to compute GDP, what type of a GDP measure is being computed?
Real GDP measure uses constant prices
Nominal GDP uses ________ prices to compute output. Fill in the blank.
Current
GDP expressed in _______ (2012) dollars is a measure of real GDP. Fill in the blank
Chained
In looking at GDP numbers, what does "s.a.a.r" mean?
Seasonally adjusted at an annual rate
With what frequency are the US GDP numbers collected and reported?
They are collected once a quarter, and reported after every month
What government agency collects and reports US GDP data?
Bureau of Economic Analysis
In what month and year did the most recent US recession begin?
February 2020
In what month and year did the most recent US recession end?
April 2020
What do economists call the period from December 2007 - June 2009?
The Great Recession
With what frequency is the CPI reported?
Monthly
What government agency is responsible for collecting and reporting the CPI numbers?
The Bureau of Labor Statistics
The Core CPI is calculated by subtracting what two items from the all-items CPI?
Food and Energy
What government agency is responsible for collecting and reporting data on the employment situation numbers?
Bureau of Labor Statistics
The GDP deflator is a measure of what?
Inflation
What is the numerical value of a price index in a base year?
100
When are national employment situation announcements made each month?
On the first FRIDAY of the month
The ___________ Survey published by the BLS is used to determine the size of the labor force and unemployment rate. Fill in the blank.
Household Survey
At least how old does someone need to be in order to be included in the adult population?
16
What is the name of the key interest rate that the Fed targets in conducting monetary policy?
Federal Funds rate
What is the current target range for the federal funds rate?
0-0.25%
What is a basis point?
= 1/100 of 1% = 0.01%
Which of the following currently purchases the largest amount of US dollars?
One British Pound will purchase the largest amount of the US dollar.
The _______ market is where short-term financial instruments (those with less than one-year to maturity) are traded. Fill in the blank.
Money
FDIC insures deposits up to what amount?
$250,000
Which of the following has the longest term to maturity when they are originally issued?
Treasury bonds
A high-yield, high-risk bond is known as _______. Fill in the blank.
Junk bond
The economic term that is used to describe a situation in which the worst credit risks may be the ones who most actively seek out loans is know as _________. Fill in the blank.
Adverse Selection
The condition (which is often found in insurance markets) that arises when peoples behavior might change once they receive funds (or become insured) is known as ________. Fill in the blank.
Moral Hazard
Savings and loan associations, savings banks, and credit unions are collectively known as ________. Fill in the Blank.
Thrifts
What type of bank focuses on such things as mergers & acquisitions, IPOs, valuation activities, placement of debt, etc.?
Investment banks
What is Gresham's Law?
bad money drives good money out of circulation
What is currently the largest component of the M1 money supply?
Savings and other deposits
What do we call an economy in which there is no money and goods and services are exchanged directly for other goods and services?
A barter Economy
In a classic economic article, a World War II prisoner of war describes economic exchange in a prisoner of war camp. What ultimately evolved as money in this POW camp?
Cigarettes
What does the term seigniorage mean?
Economic gains of monetary authorities from printing currency whose value exceeds printing costs. Inflation tax.
The interest rate that equates the current value (price) of a financial instrument with its present value of future payments is known as what?
Yield to Maturity
The coupon payment on a coupon bond is determined by multiplying the coupon rate on the bond by what?
Face Value
When a coupon bond matures, what does the final payment include?
Repayment of bond par or face value
When the current price of a coupon bond is less than its face value, how does the yield compare to its coupon rate?
Bond's yield > coupon rate
What do we call a bond that makes coupon payments and never matures?
Zero coupon bond or a console
What is the relationship between the price of a bond and its yield?
Inverse Relationship
A bond's current yield is obtained by dividing the bond's coupon payment by its ________. Fill in the Blank.
Market price
What type of a US Treasury security is always sold as a discount bond?
Treasury bill
A bond's rate of return is calculated by adding its current yield to its ______. Fill in the blank.
Capital Gain
What does TIPS stand for?
Treasury Inflation Protected Securities
The yield that is reported on TIPS is what type of yield?
negative
For a given real interest rate, what happens to market interest rates when expected inflation rises?
When inflation increases, real interest falls
In a bond market framework, where the interest rate is on the right-hand vertical axis, what is different about how the interest rate behaves as you move upward along the axis?
Interest rate decreases
What is the largest expenditure component of GDP?
consumption
Which expenditure category of GDP is routinely negative?
Net exports
Compared to January 2020, what has happened to the US labor force participation rate since the beginning of the COVID-19 recession?
Labor rate 2022: 62.2% Labor rate 2020: 63.4%
To calculate the US unemployment rate, we divide the total number of unemployed by what?
By dividing the number of unemployed persons by the number of persons in the labor force (employed or unemployed) and multiplying that figure by 100.
When the Fed changes its federal funds rate target, it always changes the target by a minimum of how many basis points?
At least 25-basis points but can be more
What was the percentage change in output (at a seasonally adjusted annual rate) in the fourth quarter of 2021?
6.9% s.a.a.r in 2021
What is higher: the level of real output at the end of 2019 or the current level of real output?
The current level of real output is higher (2021 IV: $19,806 billion s.a.a.r) than the level of real output at the end of 2019 (2019 IV: 19,202.3 billion s.a.a.r).
Since the beginning of the COVID-19 recession, what has happened to the international exchange value of the US dollar against the UK Pound?
The dollar has ultimately depreciated in value relative to the British pound.
What is the name of the common currency of the European Monetary Union?
The euro
This money market instrument is issued by firms and finance companies to help fund short-term working capital needs. What do we call this type of instrument?
Commercial papers
A monetary system in which money has no value other than in its use in exchange for goods and services is known to use what type of monetary standard?
Fiat monetary standard
OCC is the acronym for a regulator of national banks in the US. What does OCC stand for?
The Office of the Comptroller of the Currency
Who wrote The General Theory of Employment, Interest, and Money?
John Maynard Keynes
What happens to the quantity of money demanded as interest rates rise?
The quantity of money would decrease
When money demand falls during a period in which income is falling, what happens to interest rates?
Interest rates decrease
If the Fed wishes to lower interest rates through a liquidity effect, what should it do to the money supply?
Increase the money supply
What are some of the macroeconomic variables that are used in determining when a business cycle turning point has occurred? Which of these is probably the most important recession indicator? What organization is responsible for determining these business cycle turning points?
These include: real GDP, real gross domestic income (GDI), and payroll employment.
Real GDP is its most important recession indicator.
The organization responsible for this is the NBER (National Bureau of Economic research)
To what measure of the general price level does the Federal Reserve pay the most attention? What is the Fed's annual target for this measure? Have they been successful at limiting inflation rates to be at or below this target in recent months?
The Fed pays the most attention to the PCE Deflator. This is the price level associated with the "C" (consumption expenditures) component of GDP. The Fed's annual targets a 2 percent goal in this measurement. The PCE from 2021 was increasing every month Oct 4.2, 4.7, 4.9. (This is PCE excluding food and energy). They are high from the target two percent.
What are the four phases of a business cycle? Which phase tends to last the longest? What phase are we currently in? When did this phase begin?
The four stages of the cycle are expansion, peak, contraction, and trough. Expansion is the last and longest phase of the business cycle that will continue until the occurrence of the next week while a recession starts at the peak and continue until the following process. Us expansion is lasted longer than the US recession. Currently US is in its expansion phase of Business Cycle.
If the nominal interest rate is 3% and the inflation rate is 2%, what is the value of the real interest rate? Can the real interest rate be negative? Explain.
Real Interest rate= Nominal Interest rate - Inflation rate
3%-2%= 1%
Real interest rate can be negative! It occurs when the inflation rate is higher than the nominal interest rate
Six years ago, the British pound was worth $1.55. Today it is worth about $1.35? What economic term is used to describe how the pound has changed relative to the dollar during this period? Everything else equal, does this make it more or less expensive for people in the US to buy British goods and services?
The British pound has Depreciated retaliative to the dollar by 20 cents. This in turn makes it less expensive for US consumers to purchase British goods increasing our imports and increasing British exports in theory.
What do we call a bond that is issued by a state or local government? What special feature does such a bond have? Do investors in these bonds need to be concerned about default risk?
A bond issued by a state or local government is called a municipal bond. They are used to fund capital projects and a special future they have is that interest earnings are exempt from federal (and sometimes state) income tax. Despite the attractiveness of this feature, these bonds are capable of defaulting. An example given in class is the idea of a parking ramp. The interest payments for the ramp are paid for by the parking fees associated with the ramp. If people do not park there, you cannot pay your bondholders and the risk of defaulting is very real.
Are all Federal Reserve notes classified as currency in circulation? Why or why not?
Not all of them. Only Federal Reserve Notes and Treasury coin held by non-bank public are currency, Federal Reserve Notes and coin held in banks are known as bank reserves.
Currency (Treasury coin + Federal Reserve Notes held by non-bank public)—NOTE: Federal Reserve Notes and coin held in banks are known as bank reserves.
What has been the trend in holdings of small denomination time deposits over the past 13 years? How do you explain this?
The trend for small denomination time deposits is that they are declining in their use. Small denomination time deposits are small CD's, and they have a major drawback in that they are illiquid in the sense that you must hold them to term- and if you cash out early you must give up on interest earnings. This combined with the 7-year period during and after the financial crises of the Fed interest rate at 0-.25%, begins to show why there has been a trending decline. Small denomination time deposits also lack a secondary market in which to be trade between holders- like there is for large denomination time deposits.
What is more valuable: $100 today or $100 ten years from today? How would you go about comparing the value of $100 today vs. $100 ten years from today? Explain.
$100 today is more valuable than $100 in the future. Using inflation forecast you could compute the future value which would be less due to inflation. Inflation devalues your money, so it's better to receive money now than in the future.
10. What makes TIPS different than regular Treasury Bonds? Explain.
TIPS stands for treasury inflation protected security. The principal value of a TIPS adjusts for inflation while regular treasury bonds do not adjust for inflation.
What term do we use to explain how forward-looking ultrarational people will save more in anticipation of higher future taxes when the government runs budget deficits. How does this impact the effectiveness of fiscal policy in impacting economic activity? Explain.
Ricardian Equivalence.
Bond supply increases because of deficits which stimulate the economy. For rational public, in anticipation of a higher future tax bill, to save more means to demand more bonds. Expansionary fiscal policy is offset by private savings, which increase the bond demands. Ultimately, the level of interest rate is unchanged as increased demand for bond offsets the higher supply of bonds.
What South American Country is currently experiencing hyperinflation? What causes an inflation of this magnitude?
-Venezuela
-Caused by: overprinting of money, overly expansive monetary policy, corruption, over reliance on oil (economy fell when oil prices and demand dropped)
The Federal Reserve changed its definition of M1 in May 2020. What was this change? Why did they decide to change this definition? What did this do to the size of M1? How did this impact the size of M2?
Savings and checkable deposits were added to the M1 Money supply definition. This was done as they removed the old restrictions on those types of holding such as savings accounts which now had no limits imposed and could be used like any other account. This increased the size of the M1 money supply by 11.5 billion in one-month when the definition originally changed. This did not impact M2 as M1 is a component of M2, but recent monetary policy has also abruptly increased M2 recently as well.
In what decade was the Great Depression? What happened to the US price level during the first four years of this decade? What do we call the economic condition when the price level is behaving in this way? Were real interest rates high or low during the Great Depression?
The Great Depression happened roughly from 1929 to 1939. Prices of goods decreased for the first 4 years of depression. This is called deflation and during this time money became more and more valuable because of the deflationary spiral that occurred. This in turn made real interest rates higher as real interest rates are nominal - inflation or + deflation.
What was the US unemployment rate in January 2022? Was this an increase or decrease compared to December 2021? How do you interpret this change from one month ago? That is, is it good news, bad news, or neutral? How does the current unemployment rate compare to one year ago?
For January 2022: Unemployment rate = 4.0%.
December 2021: Unemployment rate = 3.9%. This is an increase compared to December 2021.
In a month 1.4 million people joined the Labor market, many of whom will return to the Labor market and lose their jobs.
The Fed appears to have a "longer run" national unemployment rate that it believes would be experienced during normal times. What is the value of this unemployment rate? Is the current national unemployment rate higher, lower, or equal to this value? What does your answer imply about the likely path of monetary policy over the next several months?
The Fed's long-term expected national unemployment rate is 4%, and that is also exactly what was most recently reported in January. So, policies will not be aimed at unemployment until it strays too far away from the expected long-term rate.
Is there any risk in a financial portfolio that includes only 30-year US Treasury bonds? Please explain.
No there is not much risk from 30-year treasury bonds. But when considering the risks of . inflation, interest rate risk, or even the opportunity cost risk there can be some. If inflation is happening in the economy your return on investment can have a low yield. If interest rates rise, then the value drops. Opportunity cost of having it be a better return on a different investment. The security you have with a treasury bond is that the federal government will always pay you back
Is US employment higher or lower than it was prior to the onset of the pandemic? Have the monthly changes in employment—especially at the beginning of the pandemic—been "normal" in size? Have all sectors of the US economy been impacted evenly since the onset of the pandemic? If not, what sectors have experienced the worst problems? Explain.
US Employment is lower than prior to the onset of the pandemic. Other than the first few months of the pandemic, monthly changes in employment have been relatively "normal" in size. April 2020 - employment fell by 20,679,000. Not all sectors have been impacted evenly since the onset of the pandemic. Accommodation and food services; arts, entertainment and recreation; retail trade; and health care and social assistance have all been heavily impacted. This is because many of these sectors rely on personal interactions and travel. Closures, travel restrictions and capacity limitations have made it difficult for these sectors.
To what does the term "crowding out" apply? When would we expect crowding out to occur? What happens to interest rates when crowding out arises? Does this make fiscal stimulus plans more or less attractive? Does it appear that crowding out is currently occurring in the US? Explain.
Crowding out applies to when private spending is replaced by government running a debt. The deficit leads to a direct impact of real GDP increase but the indirect impact of this is that interest rates rise, causing private investment falls leading to a decrease in real GDP cancelling out the growth. We would expect crowding out then to occur when the government runs deficits. Interest rates increase when crowding out occurs. This causes Fiscal stimulus to be less attractive as then you have run a debt with no real reward. However, it does not appear that crowding out has been occurring as in the last 12 years we have seen more deficits but lower interest rates, primarily because as the Bond supply has grown so has the demand keeping interest rates low, but that we shouldn't or can't expect this forever/rely on the fed.
What do we call the "narrowly" defined money supply in the US? What assets are included in this definition? Are credit cards included in this definition? Explain.
The narrowly defined money supply in the US is called M1. M1 includes currency, demand deposits and other liquid deposits such as savings deposits. Credit cards are not included in this definition of M1. Credit cards are a means of deferring payment, not a means of payment. Credit card balances are a liability to the holder, not an asset to the holder as money would be.
Other sets by this creator