BUSFIN 4265 - Midterm

In the 1930's the unemployment rate approached

25%

If GDP is $20 trillion and the money supply is $4 trillion, what is the velocity of money?

5

What happens to the AD curve if there is an increase in the money supply

AD curve shifts to the right

how is inflation gap calculated

Actual inflation - fed's target for inflation

Legal tender

Assets accepted for repayment of debt to the government as well as private transactions

Who ended the "Panic of 1907"

JP Morgan

Assets =

Liabilities + Equity

The problem is defined as the push for profits that can lead bank management to undertake risky actions

Systematic Risk

Dollarization

The situation when market participants use another country's currency as money.

In what situation did the three-part aggregate supply model not perform well

Understanding the stagflation of the late 1960s and early 1970s

This is also known as the turnover rate of money, the number of times in a period a unit of money is used

Velocity of money

Credit crunch

a reduction in the general availability of credit most often seen as an irrational increase in risk aversion

Stagflation

a time when the economy suffers from high rates of inflation and economic stagnation

Financial markets bring together

borrowers and lenders

The marginal propensity to consume is determined by dividing the change in consumption by

change in disposable income

Cause of the panic of 1907

cheap money, speculation on stock, rebuilding of san francisco

Interest rates according to keynes

constant money supply, higher demand of money, and static supply will increase interest rates

Money Supply =

currency + deposits

Traditionally, when an economy weakens, the central bank uses its monetary policy tools to _______ interest rates.

cut

Monetary policy has the best chance of influencing the level of _______ unemployment

cyclical

If interest rates increase, then changes in investment spending usually ________

Decrease

What qualifies as a liability to a bank

Demand deposits

This is the interest rate the federal reserve charges on loans it makes to member banks

Discount rate

What type of curve does the Aggregate Demand curve have

Downwards curve

Excess reserves ratio (re)

Excess reserves / deposits

Following the great depression the power of the Fed shifted to the

Federal Open Market Committee

Who sets the required reserve ratio?

Federal Reserve

Keynes suggested that what kind of spending would be necessary to move the economy out of the depression

Government spending of some kind

Keynes original aggregate supply (AS) curve is __________ until full employment is reached at which point the AS curve becomes vertical

Horizontal

What is likely to cause an increase in aggregate demand in an economy

Increases in Government Spending, consumption, investment, net exports

Asymmetric information in markets can lead to ________ outcomes

Inefficient

What is most often used in practice to maintain a relatively stable price level

Inflation targeting

Four main reasons of the 1998 Ruble currency crisis

Inflation, Excess debt, Lack of confidence, velocity of money crashed

this occurs when longer-term interest rates are lower than shorter term interest rates

Inverted yield curve

"I" in the Aggregate Demand formula refers to..

Investment

The risk that a borrower will not pay interest or principal or both as promised

default risk

The demand curve is

downward sloping

As interest rates rise, bond prices ______

fall

Commonly accepted and widely used money that has no intrinsic value is known as

fiat money

Three types of unemployment

frictional, structural, cyclical

Money defined

generally accepted in exchange for goods and services

Low GDP =

high inflation, higher unemployment

What level of employment do we see with stagflation

high or increasing

Longer-term bonds have

higher yields

According to the "liquidity trap," as an economy shows signs of weakness, businesses ______.

hold cash

Business trusts are _______ integrated ownership structures

horizontally

if there is a lack of economic activity due to banks not lending, unemployment may ________

increase

The advantage of municipal bonds over corporate bonds increases as the federal marginal tax rate...

increases.

A monetary policy where the central bank uses its tools to achieve a stated rate of inflation over time

inflation targeting

Compound Interest is defined as

interest earned on the principal plus interest

The relationship between the economy wide price level and the level of real GDP illustrated bu the Aggregate Demand curve is

inverse.

Federal reserve notes are considered to be

liabilities of the Federal reserve

Demand deposits are very _______

liquid

Increased borrowing leads to an increase in the demand for __________ _____

loanable funds

A similar result is seen in many applications of the Taylor Rule, we see a big gap open up between what the Mankiw Rule suggests and the actual federal funds rate. The actual federal funds rate was too___ and remained too low until after the economy slid into the Great Recession.

low

When a government __________ public debt, it is essentially forcing the banking system to create money for the government to spend

monetizes

store of value

money must retain some of its purchasing power over time.

Time value of money

money received today today has a higher value than money received in the future

Short-term bonds are generally

more liquid

Real interest rate =

nominal interest rate - inflation rate

Board of Governors

operate the fed, commercial banks, and monetary policy

The coupon rate of a bond refers to the

original amount of money borrowed by the bond issuer

The _______ bond was used to raise money to fund the construction on the western pacific railroad

pacific railroad

The concept that the quantity of money is directly proportional

price level

Short run of the yield curve is affected by...

rate hikes

Diversification

reducing risk by holding a variety of assets

Actual bank reserves are equal to

required reserves + excess reserves

This is considered one of the biggest transaction costs in financial markets

search costs

Steep yield curve suggests that...

short term rates will be significantly higher in the future than what they are currently

Changes in the monetary base have a multiple or _________ effect on the overall money supply

snowball

For something to be considered money it must be...

standardized, divisible, portable, physically durable, broadly demanded

Flat yield curve

suggest short term interest rates in the future will be where they are well into the future

Liquidity

the ease with which an asset can be converted into cash

A major advantage that municipal bonds have over corporate bonds for investors is that

the income earned on municipal bonds is not subject to federal income tax

The wider the bid ask spread,

the more likely to default

The greater the default risk

the more the lender is going to be compensated for lending

Output Gap

the percentage difference between actual aggregate output and potential output

What do we refer to when we talk about time preference

the rate at which someone wants to consume today instead of in the future

Aggregate Supply

total supply of final goods and services produced

Long end of yield curve is affected by..

unemployment, GDP, inflation

Medium of Exchange

usable for buying and selling goods and services

If there is $1 billion worth of currency in circulation and $2 billion in reserves, how much is the current monetary base?

$3 billion

Money supply multiplier =

(1 + k)/ {K + rr + re}

Mankiw Rule =

(8.5 + 1.4) * ( Core inflation - Unemployment)

How is output gap calculated?

(Actual GDP - Potential GDP) / Potential GDP

The FOMC is made up of ________ members.

12

Who was the first president of the Federal Reserve Bank of New York

Benjamin Strong Jr.

Causes the SRAS curve to shift

Changes in cost of inputs, taxes, seller expectations, number of sellers

M1 = Currency + _______

Checkable Deposits

This country experienced a currency crisis in 1999

Russia

The actual level of output (actual GDP) is determined by the intersection of

SRAS & AD

Monetary Base =

Currency + Reserves

currency ratio (k) =

Currency / Deposits

3 items that compose "monetary base"

Currency in circulation, Treasury currency in circulation, bank reserves

Pigou's effect

Lower prices increase the purchasing power of public's savings, resulting in a higher level of spending

M2 =

M1 + savings deposits + money market accounts + small-denominated time deposits + money market mutual funds

What is the most often used and the most flexible monetary tool used by the federal reserve

Open market operations

Healthy banks are allowed to borrow from the Federal Reserve for short periods of time, historically _________.

Overnight

Fed Funds Target Rate =

Real fed funds rate + Inflation rate + 1/2(Inflation gap) + 1/2(output gap)

The interest rate that has been adjusted for inflation

Real interest rate

Required reserves ratio (rr)

Required reserves / deposits

What increases the quantity of real GDP supplied and is shown as a movement along the aggregate supply curve

Rise in price level

Hung Debt

a company will finance an acquisition through an investment bank and then the bank cannot sell their shares to the secondary market

When considering the Money supply Multiplier, an increase in both the Required Reserve Ratio and the Currency Ratio will result in _____ to the Money Supply.

a decrease

The result of asymmetric information in a market is _______ selection

adverse

Interest rates move _____ with the economy or business cycle

along

Official semi-dollarization

another country's currency is legal tender, but the country also issues its own currency

Financial Assets

are intangible assets

If the market interest rate is the same as the coupon rate on a newly issued bond, the bond will sell

at par