Chapter 8

expansionary monetary policy

Expansionary monetary policy is also referred to as easy monetary policy. The Federal Reserve follows an easy monetary policy when it wants to expand the level of income and employment. he Federal Reserve may decrease the reserve requirement affording banks the opportunity to loan more money to borrowers.

Responsibility of the FED

Set the discount rate, the reserve requirements, and the activities of the Federal open market committee

Yield spread narrows

government bonds<corp bonds, invest in more risky investments "flight to quality has ended" (economy is good, worth the risk)

Yield spread widens

government bonds>corporate bonds, invest in higher quality bonds (economy is weakening, go for safer)

Debit/credit account balance for nations trade account

if high imports, debit (dollar is strong) (trade deficit) if high exports, credit (dollar is not strong) (trade surplus)

lagging indicators

indicators that seem to lag behind changes in overall business activity (buildup of inventories, cpi for services, average duration of unemployment, average prime rate)

during economic recession,

interest rates go down, bond prices go up

inverted yield curve (descending)

investors buying long term bond and selling short term bond, causes negative slope (short term interest rates higher than long term interest rates)

top-down approach

looking at industry and then deciding what companies will preform well in that industry start with big picture and narrow it down to most attractive individual stock

prime rate

rate of interest that banks charge on loans to their best business customers

2 consecutive quarters of economic decline

recession

Trade Deficit

situation in which a country imports more than it exports, causes selling pressure on its currency, therefore lowering its exchange rate against other currencies.

too much exports would do what to the $

strengthen (trade surplus)

Defensive Industries

those that are least affected by the stage of the business cycle and include utilities, consumer staples, and basic services. (non renuable consumer goods) (food, pharmaceuticals, tobacco, and energy)

Recession

2 or more consecutive quarters of economic decline

monetary policy

-FEDs main job -Money supply, discount rate, reserve requirements -Economy and inflation are best controlled through the management of the money supply rather than through fiscal policy stimulation

Consumer Price Index (CPI)

-computed monthly -measures the rate of increase or decrease in a broad range of prices, such as food, housing, medical care, and clothing. -measures the increase in the general price level of a basket of consumer goods.

upward slopping yield curve

-long-term rates are above short-term rates -represent increase risk in default over time -represent time value of money -represent increase in inflation expectation

Bottom-up analysis

A type of fundamental analysis involving a look at particulate companies rather than the overall economy.

Call loan rate (broker loan rate)

Broker-dealers pay on stock market collateral pledged for margin accounts

Who approves the budget?

Congress

if the dollar weakens

If U.S. interest rates rise, foreign investors would invest in U.S. dollar-denominated securities, thereby increasing the demand for dollars and causing the dollar to strengthen.

cyclical industries

Industries most affected, both up and down, by the business cycle. Items such as luxuries and large-ticket items (autos, homes, appliances) are normally cyclical. Food and tobacco are normally not cyclical.

Credit Spread

The difference in yields between two issues that are similar in all respects except credit rating(gov vs corp bond; Decline when economy is good because yield is narrow, people invest in more risk things; Increase during economic contractions, people invest in safer things

Federal Funds Rate (FFR)

The interest rate banks charge one another on overnight loans made out of their excess reserves.

discount rate

The interest rate on the loans that the Fed makes to banks (when banks borrow from fed)

Keynesian economics

Theory based on the principles of John Maynard Keynes, stating that government spending should increase during business slumps and be curbed during booms.

too much imports would do what to the $

Weaken (large outflow of US dollars) (trade deficit)

Core CPI

a measure of the overall cost of consumer goods and services excluding food and energy

Depression

at least 6 quarters of economic decline

coincident indicators

economic indicators that usually change at the same time as changes in overall business activity (personal income industrial production, manufacturing and trade sales, nonagricultural employment)

leading economic indicators

economic series that tend to rise or fall in advance of the rest of the economy (building permits, stock prices because they anticipate market activity, average weekly unemployment insurance claims, orders of durable goods like machine tools, money supply

When analyzing the business cycle, you would expect which phase to occur before reaching the trough?

contraction

Rising interest rates cause the values of all fixed-income securities to

decline... That is why bonds are not an attractive investment during periods of inflation. Values of real estate, gold, and natural resources tend to rise with inflation.

U.S. Fiscal policy

determined by president and congress through budgeting and taxation.

If US exports become more competitive,

dollar is weaker, cheaper in local currencies, good for US exporter.

Inertial Inflation

economic condition where the rate of price increases reaches a stable equilibrium and stays there until a shock to the system occurs, at which time, the rate of inflation changes