Acc/Manec 453 Midterm Review III

Acc/ManEc 453 Midterm Review III

Key Concepts Since Last Midterm

Bank Regulation: Mishkin, Ch 10 & 11 Adverse Selection Moral Hazard National Bank Act of 1863 Dual banking system Federal Reserve Act of 1913 McFadden Act 1927 Glass-Steagall Act of 1933 Gramm-Leach Bliley Act of 1999 Riegle-Neal Act of 1994 Decline of Traditional Banking FDIC Insurance S&L Crisis

Aggregate Demand and Supply: Mishkin Ch 25 (posted on web site) Why inflation is bad Why volatile output is bad Aggregate demand Curve Velocity Keynsian view of the components of aggregate demand Crowding out Long Run Aggregate Supply Short-Run Aggregate Supply Short-Run Supply Curve Economic Spectrum (Keynsians vs. Monetariasts) Deflation and impact on economy Gold Standard Passive Monetariast Policy Active Monetariast Policy Elements of Effective Central Banks Evaluating impact of policy in demand-supply frame work (Keynsian vs. Monetariast)

Central Banks: Cecchetti Ch 16 Central bank responsibilities as “the government’s bank” Central bank responsibilities as “the banker’s bank” Open Market Operations Central bank Objectives Central bank independence and inflation Central bank independence and unemployment Banking act of 1935 Eccles and Fed Independence Federal Reserve System Board of Governors Board of Governors duties Regional banks Regional bank duties FRB New York Federal Open market Committee: voting members Federal Funds Rate Discount Rate Beige Book Green Book Blue Book Power within FOMC How well the Fed meets elements for an effective central bank

Money Supply Process: (Cecchetti, Ch 16) Commercial Bank balance Sheet Central bank Balance Sheet Effect on balance sheet of central bank and commercial banks: Float Open market operations Purchase of Foreign Bonds by Fed Discount Loans Simple Deposit Multiplier Money Multiplier As ratios change, how does multiplier change? What does this mean about relation between M and MB?

Central Bank Policy: (Cecchetti, Ch 18 and 19) Policy tools of the Fed Link between Fed Funds rate and inflation Discount Lending Primary, Secondary Credit Reserve Requirements Inflation targeting Targeting money supply Purchasing Power parity Fixed exchange rates in the long Run Fixed exchange rates in the short run Benefits and Costs of a fixed-exchange rate regime Currency Boards Dollarization

Monetary Policy Evidence: (Bernanke Speech, Eccles Article) Great Depression: output, unemployment, prices Early views on what caused the Great Depression Eccles Views of the Great Depression Friedman and Schwartz “A Monetary History of the United States” Main findings Four policy decisions of Fed which led to tighter money supply during Great Depression Evidence that tight monetary policy caused the great depression Key Concepts from Prior Midterms

Midterm I  Primary markets  Secondary markets  Direct/Indirect Finance  Net return/ gross return  Growth rates and future value  Present Value  Growth rates and compounding  APR/EAR  Bond pricing – zero coupon, annual coupon, semi-annual coupon  Yield-to-maturity - zero coupon, annual coupon, semi-annual coupon  Interpretation of YTM  Inflation and CPI  Calculating bond returns  Banks and their influence on the money supply  Bank balance sheets in equilibrium  Bond Supply and Demand: Factors that shift the demand curve, factors that shift the supply curve  Yield Curve  Expectations theory  Forward rates  Locking in loans at the forward rate  Geometric mean  Arithmetic mean  Liquidity Preference Theory  Yield Curve and Recessions  Converting from one exchange rate to another  Purchasing power parity  Inflation and Exchange Rates  Dollar Supply and Demand: Factors that shift the demand curve, factors that shift the supply curve

Midterm II Interest Rate Risk  Parallel shift in the yield curve  Modified Duration  Macaulay’s Duration  Five duration rules  Modified duration of a portfolio  Tailoring the balance sheet to achieve a desired level of interest rate risk

Futures Contracts  Spot price  Futures price vs. future spot price  long and short positions  Payoff at maturity  Hedging interest rate risk using futures  Short selling  No arbitrage futures price

Options  Long and short positions  Premium, payoff and profit  Hedging interest rate risk using options  Factors that effect option prices  Binomial option pricing

Swaps  Interest-rate swaps  Managing interest rate risk using interest rate swaps  Swaps and comparative advantage  Credit default swaps Vocabulary Terms

Mishkin Chapter 11 (From "Key Terms", page Mishkin Chapter 10 (From "Key Terms", page 275) 306) Bank Holding Companies Basel Accord Deposit Rate Ceilings off-balance sheet activities disintermediation regulatory arbitrage securitization regulatory forbearance

Mishkin Chapter 25 (From "Key Terms", page 601) Cecchetti Chapter 16 (From "terms", page 423) (version posted under "Additional Materials Board of Governors of the Federal Reserve System activists discount rate aggregate demand curve federal funds rate aggregate supply curve FOMC animal spirits Federal Reserve Banks complete crowding out Federal Reserve System Keynsians FOMC Statement long-run aggregate supply curve monetariasts natural rate of output natural rate of unemployment nonactivists partial crowding out velocity of money

Cecchetti Chapter 17 (From "terms", page 457) Cecchetti Chapter 18 (From "terms", page 486) central bank's balance sheet discount lending currency-to-deposit ratio discount rate deposit expansion multiplier federal funds target rate discount loans inflation targeting excess reserves lender of last resert excess reserve-to-deposit ratio market federal funds rate float matched-sale purchase (reverse repo) monetary base open market trading desk multiple deposit creation primary credit open market operations repurchase agreement (repo) open market purchase reserve requirement open market sale secondary credit required reserve ratio secondary discount rate required reserves reserves vault cash

Cecchetti Chapter 19 (From "terms", page 512) Bretton Woods System capital controls currency board dollarization