Shared Flashcard Set

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G345 Case and Application Notecards
Final Exam prep
20
Business
Undergraduate 2
12/10/2012

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Cards

Term
How do central banks set monetary policy?
Definition
- Set the discount rate
- Open Market Operations

This affects the market interest rates
Term
How did the ECB respond to the economic crisis in Europe
Definition
1. Injected 95 billion Euros (provided cheap loans to banks)
2. Created long-term loas (3, 6, 12 months)
- These moves allowed the banks not to freeze its assets
Term
What is the ECB's main goal and how did this affect their response to the financial crisis
Definition
To keep inflation stable
- Inflation was so high that they could not lower the interest rate for fear that it'd go higher
- Waited until inflation settled down and cut the interest rate to 1% so that there was room to decrease it even further
Term
What was the ECB's analysis of the financial crisis problem?
Definition
Thought it was a problem of liquidity
- Turned out to actually be a credit crunch because banks held excess reserves and were hesitant to loan any money
Term
Why did the ECB respond less aggressively to the financial crisis than the Fed
Definition
1. The Fed had a long reputation of maintaining inflation
2. ECB looks at an aggregate indicator therefore the problem looked less severe until some of the major banks began to fail
Term
The case for the ECB buying the Greek debt
Definition
If the Greek's restructure their debt and default, the interest rates in the countries with uncertainty will see their interest rates sky rocket
- The failure of Greece would create panic in other shaky economies because the interest rate is often driven by fear
Term
The case against the ECB bailing out Greece
Definition
Moral hazard because if the ECB buys the Greek debt, the monetary institution has fixed the problem and takes away the accountability of the fiscal institutions (Governments)
- Gives the governments a sense that there is a safety net because the ECB will bail them out
Term
What are the merits of a floating exchange rate?
Definition
- Free capital flows- capital is allocated to the best possible investment because there are no restrictions
- Country maintains sovereign monetary policy and the ability to intervene and appreciate/depreciate their currency
Term
What are the merits of a fixed exchange rate?
Definition
- Transparency
- Control inflation because you peg it to a more stable currency
- Monetary policy is taken away (good if your policymakers are not capable of making good decisions)
Term
Loss of Monetary policy with a fixed exchange rate
Definition
A central bank can't print money when things aren't going well if it does not have the foreign reserves
- If foreign reserves shrink the money supply decreases
Term
How could a country fix its BOP
Definition
Devaluing currency to become more competitive in exports
Term
How can a central bank help decrease unemployment
Definition
Decreasing interest rates to create more investment and opportunity to expand business
Term
Requirements of maintaining a currency board
Definition
All domestic currency must be backed 100% by foreign reserves
Term
Good implications of a currency board
Definition
- Increases transparency in monetary policy which is simplified
- Stabilizes prices
Term
Bad implications in a currency board
Definition
Could bring about a capital flight to the foreign currency due to increased uncertainty about the future of a currency
Term
What is the IMF's position on the currency board for Indonesia
Definition
Basically said if Indonesia adopts it, they will revoke any bailout money offered
- This could decrease the IMF's credibility if it works
- Maximizes their bureaucratic power
IMF thought it was a quick fix to a more complicated problem and that Indonesia needed fiscal institution changes and not just monetary help
Term
Why did the money supply decrease during the Great Depression Bank Panics
Definition
There was an outflow of bank deposits to currency
- Also an increase in excess reserves of banks
This caused the money multiplier to decrease because there is less money on deposit to multiply
Term
Equation to support how the money supply decreased while the monetary base increased during the Bank Panics of 1929-1933
Definition
% change in MS= % change in MB + % change in Money Multiplier
Term
How was the tripling of the monetary base offset during the financial crisis of 2007-2009
Definition
- The currency ratio somewhat fell which would create an even higher money multiplier
- However, the amount of excess reserves increased so much that it decreased the money multiplier
Term
Describe why the dollar initially depreciated, then appreciated during the financial crisis of 2007-2009
Definition
The Fed had to initially lower interest rates which depreciated the dollar, while the ECB did not act as aggressively to lower rates
- when they eventually lowered rates, there was a flight to quality to the US dollar because the expected relative return of the US dollar was increasing
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