All Subjects

Question 1

Quantitative Easing

Answer 1

when there’s not enough money flow, the National Bank (Fed) buys bonds and mortgage-backed securities, which serves to lower interest rates and increases spending

Question 2

Quantitative Tightening

Answer 2

when economy is overheating, risk of too high inflation, the Fed sells T-Bonds or lets them mature and removes them from balance sheet -> this removes money from the economy and leads to higher interest rates

(selling of bonds means an increase of supply of bonds available in the market -> potential bond buyers would require higher yields -> rise of borrowing cost for consumers -> dampening of demand for assets and goods & services -> stabilization / lowering of prices)

Question 3

Expectation Theory

Answer 3

• predicts future short-term interest rates based on current long-term interest rates
• suggests that an investor earns the same amount of interest by investing in two consecutive one-year bond investments versus investing in one two-year bond today

Question 4

Transmission Mechanism

Answer 4

• the process through which monetary policy decisions affect the economy in general and the price level in particular, it is characterized by long, variable and uncertain time lags
• affects economic growth, prices, asset prices, demand, interest rates, amount of money & credit

Question 5

Federal Reserve (Fed)

Answer 5

• US National Bank
• keeps economy stable by managing the supply of money in circulation
• regulates & supervises banks
• keeps inflation & employment rate stable
• adjusts interest rates for Treasury debt

=> ensures lenders and borrowers have access to credit & loans

Question 6

Treasury

Answer 6

• issues bonds, bills, notes
• manages all the money coming into the government and paid out by it (federal spending)
• collects government’s tax revenues
• distributes government’s budget
• prints money
• offers economic advice to president

Question 7

Crowding-In

Answer 7

• increase of private investment due to increased public investment -> increase of economic growth -> encourages firms to invest because of profitable investment opportunities

Question 8

Crowding-Out

Answer 8

when increased government involvement in a sector of the market economy substantially affects the remainder of the market, either on supply or demand side
-> expansionary fiscal policy reduces investment spending by the private sector (increased interest rates)

Question 9

Deficit Spending

Answer 9

when a government’s spending is greater than its revenues for a fiscal period, causing a deficit in the government’s budget, meaning the government must take on debt to finance its spending

Question 10

Federal Funds Rate

Answer 10

• target interest rate range set by the Fed
• rate at which commercial banks borrow and lend their excess reserves to each other overnight (in CH SARON)

Question 11

Positive Output Gap

Answer 11

indicates a high demand for goods & services but the effect of excessively high demand means businesses & employees must work beyond their maximum efficiency level
-> commonly leads to inflation because both labor costs & prices of goods and services increase in response to the increased demand

Question 12

Negative Output Gap

Answer 12

indicates a lack of demand for goods & services which leads to companies & employees operating below their maximum efficiency levels
-> declining GDP growth rate and potential recession as wages & prices of goods typically fall when demand is low

Question 13

Monetary Policy

Answer 13

• enacted by a central bank (Fed) to sustain a level economy and keep unemployment low, protect the value of the currency and maintain economic growth through:

-> Open Market Operations (OMO) buys / sells bonds to change number of outstanding government securities and money available to economy

-> Interest Rates
may change interest rates, so banks will loan depending on this interest rate

-> Reserve Requirements
can change reserve requirements (funds that banks must retain as proportion of deposits)
- lowering requirements releases more capital for the banks to offer loans or buy other assets
- increasing requirements decreases bank lending and slows growth

=> monetary policy affects borrowing, spending and saving

Question 14

Fiscal Policy

Answer 14

tool used by governments (Treasury Department)

-> creation of new money and implementation of tax policies -> sends money directly or indirectly into the economy to increase spending and growth