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Series 7 ch 4
Economics
51
Finance
Professional
12/18/2012
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Term
The Fed can influence the economy through four types of actions:
−
Open market operations
−
Discount rate
 Definition
Reserve requirement
−
Margin requirements
Term
The Fed uses open market operations the most to
 Definition
influence the economy.
Term
When the Fed is buying treasury securities,
 Definition
more money is going into the economy, which eases money, lowers interest rates, and increases the money supply.
Term
When the Fed is selling Treasury securities,
 Definition
less money is going into the economy, which tightens money, raises interest rates, and decreases the money supply.
Term
If the Fed (FOMC) is buying,
 Definition
overnight lending between banks goes down.
Term
If the Fed is selling,
 Definition
there may be more overnight borrowing by the banks.
Term
Payment in Fed funds means that the Fed payment
 Definition
be deposited into the bank’s account at the Federal Reserve Bank. This account is used for meeting the bank’s reserve requirement as well as for purchasing and selling the Fed’s Treasury securities.
Term
By changing the discount rate,
 Definition
the Fed controls the money supply.
Term
When the Fed increases the discount rate to member banks,When the Fed increases the discount rate, it discourages borrowing.
 Definition
fewer banks borrow money, and the supply of money available for loans decreases.The result is that fewer customers borrow due to the higher costs of borrowing.
Term
The Fed can also control the money supply through reserve requirements.
 Definition
RESERVE REQUIREMENT. The reserve requirement is the percentage of deposits that the banks must keep on reserve and not loan out to other customers.
Term
When the Fed increases the reserve requirement,
 Definition
the banks must keep more of their deposits in reserve, and as a result, they have less money available to lend.
Term
it lowers the money supply.
 Definition
Fed increases the reserve requirement
Term
Fed decreases the reserve requirement it increases the money supply.
 Definition
the banks have to keep less deposit money in reserve and therefore have more to lend.
Term
MULTIPLIER EFFECT on the money supply
 Definition
Whenever the Fed changes the reserve requirement
Term
MARGIN REQUIREMENTS
This only affects the stock and bond market and, thus, the fewest people. For this reason, the changing margin rates for stock purchases is the least used method for influencing the money supply.
 Definition
The Fed determines the amount investors must deposit when buying securities with Regulations T and U.
Term
The Fed decreases the flow of money by taking money in from the market. This is considered a DEFLATIONARY MOVE and is done by:
•
Selling Treasury securities in the open market
•
Raising the discount rate
 Definition
•
Raising the reserve requirement
•
Raising the margin requirement
Term
The Fed increases the flow of money by putting more money into the market. This increase is considered an INFLATIONARY MOVE, and is done by:
•
Buying Treasury securities in the open market
•
Lowering the discount rate
 Definition
•
Lowering the reserve requirement
•
Lowering the margin requirement
Term
the interest rate that commercial banks charge when borrowing from each other to meet the overnight reserve requirement.
 Definition
The FEDERAL FUNDS RATE
Term
the interest rate that commercial banks charge when borrowing from each other to meet the overnight reserve requirement.
 Definition
The FEDERAL FUNDS RATE
Term
the most volatile of all the interest rates
 Definition
The federal funds rate
Term
The federal funds rate is the first indicator of changing interest rates because the minimum and maximum each day is set by the Fed, but adjusted by the banks as needed.
 Definition
The federal funds rate is generally lower than the discount rate set by the Fed.
Term
The CALL MONEY RATE is the rate that broker/dealers charge clients for purchases of exchange-listed securities on margin.
 Definition
This is the rate charged on the client’s debit balance.
Term
M1 is composed of:
•
All currency in circulation
•
Demand deposits
 Definition
•
Interest-bearing checking accounts
Term
M2 is all of M1 plus:
 Definition
•
Money market funds
Term
M3 is all of M2 plus:
•
Large time deposits in commercial and savings banks and savings and loans ($100,000 or more)
 Definition
•
Balances in institutional money funds
•
Eurodollars held by U.S. residents in foreign branches of U.S. banks
Term
When the Fed lowers interest rates and increases the supply of money and credit, people have money and can purchase goods.This causes a demand for the goods and inflation occurs.
 Definition
INFLATION is the increase in the average price level of all products in an economy.
Term
When the Fed lowers interest rates and increases the supply of money and credit, people have money and can purchase goods.This causes a demand for the goods and inflation occurs.
 Definition
INFLATION is the increase in the average price level of all products in an economy.
Term
During inflation, interest rates are decreasing or are already low.
To counter inflation,
 Definition
the Fed will increase interest rates until the prices of goods level off or even drop to some degree.
Term
DEFLATION is the decrease in the average price level of all products in an economy.
 Definition
Deflation occurs when the aggregate demand decreases faster than the aggregate supply.
Term
As prices decrease, the amount that a dollar buys increases, and thus, deflation occurs.
 Definition
Deflation can be said to increase the real purchasing power of the dollar.
Term
To counter deflation because rates are high
 Definition
the Fed lowers interest rates
Term
The amount of times a dollar is spent in a given period of time
 Definition
VELOCITY OF MONEY.
Term
two consecutive quarters of declining business activity, as measured by the Gross Domestic Product (GDP).
 Definition
A recession is also defined
Term
defined as six consecutive quarters of declining business activity as measured by the GDP.
 Definition
A DEPRESSION is defined as a general economic decline with falling prices, high unemployment, and a low confidence in the economy.
Term
the PRIME RATE is also an indicator of the economy in that it reflects the money supply
 Definition
as well as the demand for money.
Term
Short-term bonds react quickly to fluctuating interest rates
 Definition
react more quickly to fluctuating INTREST rates than do long-term bonds.
Term
Long-term bonds adjust their prices more
 Definition
Because the premium or discount of long-term bonds is divided by a larger number (the time to maturity) to achieve the same change rate,
Term
Example
Bonds at a discount will appreciate faster than bonds at a premium, due to the pull of par;
 Definition
bonds at a premium will decrease faster than bonds at a discount for the same reason.
Term
The prices of bonds with the greatest amount of time remaining until maturity always
 Definition
move the most. The longest bonds always move the most. When in doubt, always pick the longest to maturity.
Term
The dollar becomes devalued against other currencies for three main reasons:
1.
The U.S has a large trade deficit with other countries causing them to have a trade surplus with us.
 Definition
2.
The center of economic activity is shifting to fast-growing countries such as China, Japan, and Brazil.

3.
The dollar is the underlying backing of all foreign currency.
Term
When the U.S. dollar loses value, U.S. exports become more competitive in markets at home and abroad,
 Definition
while foreign goods become less competitive.
Term
foreign goods become more competitive.
 Definition
When the U.S. dollar increases in value, or if the exchange rate increases, U.S. goods become less competitive at home and abroad,
Term
If the dollar is DEVALUED, bonds drop in price, yields go up,
 Definition
U.S. goods become more competitive.
Term
dollar is REVALUED (appreciates), bonds go up in price, yields go down,
 Definition
U.S. goods become less competitive.
Term
Euro holders use the Euro in their trade with other businesses and individuals, and usually do not exchange it for the currency of their country.
 Definition
However, the currency of these countries can be exchanged for the Euro.
Term
Only those countries that have adopted the Euro use it as payment for services and goods,
 Definition
and those that do not treat it as a foreign currency.
Term
Monetarists believe that the most influence can be exerted on the economy by
 Definition
by changing interest rates and the money supply.
Term
KEYNESIAN THEORY believe that an economy can only grow
 Definition
if the government increases its spending.
Term
Keynesians believe that if the government raises taxes and puts more money in the economy through increased government spending,
 Definition
it will result in more money for people to spend.
Term
The SUPPLY-SIDE THEORY:
The supply-side theory suggests that the government should take a passive role in the economy.
 Definition
holds that good fiscal policy, tax cuts, and less government spending will generate a healthy economy
Term
Leading indicators are signs suggesting where the market may be
For the exam, know the following:

STANDARD & POOR’S 500 INDEX (S&P 500)

BUILDING PERMITS FROM THE HOUSING STARTS REPORTS
 Definition
DURABLE GOODS

MACHINE TOOL ORDERS

CONSUMER CONFIDENCE INDEX (CCI)
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