Chapter 2 Flashcards
FED (federal reserve): goals
federal reserve act mandates the fed to conflict monetary policy “so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates”
FED (federal reserve): tools
- reserve requirements
- discount rate
- open market operations
financial markets
number of different types of markets for the creation and exchange of financial assets such as stocks and bonds
- institutions are the firms
Primary markets
new security issues are sold by companies (debt or equity) directly to investors
secondary markets
owners of outstanding securities can sell them to investors
real interest rate
interest rate that would exist in the absence of inflation
nominal interest rate
rate of interest that is unadjusted for inflation
basics of Fisher equation
- relationship between nominal and real interest rates under effect of inflation
- equation states that the nominal interest rate is equal to the sum of the real interest rate plus inflation
equation: i = r + deltaPe
i = nominal (or market) rate of interest
r = real rate of interest
deltaPe = expected annualized price-level change
rdeltaPe = adjustment of the interest rate for expected price-level change
EMH (efficient market hypothesis)
- a theory concerning the extent to which information is reflected in security prices and how information gets incorporated into security prices
strong form of the efficient market hypothesis
theory that security prices reflect all information
private information
information that is not available to all investors
semistrong-form of the efficient market hypothesis
theory that security prices reflect all public but NOT private information
weak form of the efficient market hypothesis
theory that security prices reflect all information in past prices, but not reflect all private or all public information
