Economics & Monetary Policy Flashcards Preview

The rate that a broker-dealer pays a bank when a broker-dealer borrows money so that a customer can purchase securities on margin.

A prolonged period of increasing stock prices, typically caused by the expectation of an expanding economy.

The recurring pattern and fluctuation in economic activity ranging over several months to a number of years. The four phases of the cycle are: expansion, peak, contraction, and trough.

A country’s banking institution, such as the Federal Reserve Board in the US, which is tasked with controlling the nation’s money supply.

Sometimes referred to as laissez-faire economics, an economic theory that believes that a free market economy with no government interference would achieve full employment and the best results.

An economic measure that is used to confirm current trends and changes in the economy.

Measures inflation by measuring the change in the average price of consumer goods and services from one period to the next.

One of the four stages of the business cycle, characterized by a slowdown in the pace of economic activity.

A government policy in which a government’s tax revenues outweigh its spending. The goal of this policy is to slow down economic growth.

Shares of a company that mirror the larger economic environment. They tend to increase in value when the company is growing and decline in value in a recessionary environment. Examples include companies that produce high-ticket consumer items, such as cars and large appliances.

Shares of a company that are resistant to downturns in the economy. Sometimes referred to as recession-proof stocks, these include companies that produce consumer staples, such as food retailers and cosmetics and alcohol companies.

A sustained, long-term downturn in economic activity, typically characterized by a 10% drop in GDP or at least six consecutive quarters of negative GDP growth.

A tool of the Federal Reserve Board, this is the interest rate the Fed charges banks over short-term loans. To ease the money supply, the Fed would lower the rate, allowing banks to borrow at a cheaper rate. To tighten the money supply, the Fed would raise the rate, making it more expen-sive for banks to borrow money from the Fed.

A situation in which the Federal Reserve Board wants to drive down interest rates, by increasing the money supply. To do this, the Fed would purchase government securities from primary dealers or lower the discount rate and/or reserve requirement. This action will generally spur economic growth.

Measures that help evaluate the health of the economy, including its past, current, or future performance.

Refers to government intervention to impact economic performance, generally to stimulate an economy out of recession or to constrain excessive growth and prevent inflation.

Encompasses all wealth and resources of a specific area or country, especially as these relate to production and consumption of goods and services.

Specifies how much one currency is worth in terms of another.

One of the four stages of the business cycle, characterized by increased economic activity.

A government policy in which government spending exceeds tax revenue. The goal of this policy is to spur economic growth at the cost of increasing the budget deficit.

The total costs incurred by a business to generate its sales. This includes variable costs, which are the costs directly associated with producing the goods that generate sales as well as the fixed costs of the business.

A product or service that is sold to a trading partner in another country.

The interest rate that banks charge each other for overnight loans. This rate is heavily influenced by the open market operations of the Federal Reserve Board. However, it is not actually set by the Fed. Instead, it is determined by supply and demand in the market.

The arm of the Federal Reserve Board that conducts open market operations, therefore controlling the amount of money in circulation.

The use of government spending and taxation to influence the economy.

A rare type of yield curve in which short-term and long-term yields are equal to one another.

The total market value of all goods and services produced within a country.

The total market value of all goods and services produced by the residents of a country, even if they are living abroad.

One of a company’s financial statements, which shows the revenue, expenses, and net income of a business over a period of time.

A product or service that is purchased from a trading partner in another country.

A rise in the prices of goods and services in an economy over a period of time, which is measured by the Consumer Price Index.

A type of yield curve in which the yields on short-term bonds are higher than the yields on long-term bonds. This is often a sign of an upcoming recession.

An economic measure that is used to confirm past trends and changes in the economy.

An economic theory that believes that government intervention in the form of government spending and taxes can help ensure a strong economy.

The component of a company’s balance sheet that reflects everything a company owes.

An economic measure that is used to predict future trends and changes in the economy.

Set by the Federal Reserve Board, it is the amount of money in circulation, which helps to control inflation and economic growth.

An economic theory that believes that controlling the money supply of a country can help control inflation and economic growth and therefore ensure a strong economy.

When the rates of return between bonds with different quality ratings decrease, forecasting a smaller risk of default on lower-grade bonds.

A government policy in which government spending equals tax revenue in order to maintain a balanced budget.

The profits earned by a company after all of its expenses, including fixed and variable costs, interest expenses, and taxes, have been paid.

The most common type of yield curve in which longer maturity bonds have a higher yield compared to shorter-term bonds. Higher rates for longer maturities compensate investors for the default risk associated with longer-term bonds.

The primary tool of the Federal Reserve Board’s monetary policy, which is the buying and selling of government securities with primary dealers (banks). To ease the money supply, the Fed would buy securities as this would add cash to the banking system. To tighten the money supply, the Fed would sell securities as this would remove cash from the banking system.

One of the four stages of the business cycle, in which an expansion reaches its highest point and marks the beginning of an economic downturn.

Banks that are required to buy and sell government securities with the Federal Reserve Board in order to aid in open market transactions and allow the Fed to implement monetary policy.

The interest rate that banks charge their most credit-worthy customers, typically large institutional clients.

The change in gross domestic product (GDP) from one period to another, adjusted for inflation.

A prolonged period of contraction defined as a decline in GDP for at least two consecutive quarters.

A tool of the Federal Reserve Board requiring banks to keep a certain percent-age of deposits on hand that are not to be lent out to customers. To ease the money supply, the Fed would lower this requirement, allowing banks to give out more loans. To tighten the money supply, the Fed would raise this requirement, forcing banks to keep more money on reserve and therefore allowing them to give out fewer loans.

The portion of a company’s net income that is not paid out to shareholders and is instead reinvested in the business.

The sales of a company’s products and services that are generated by a business.

The component of a company’s balance sheet that reflects the difference between a company’s assets and its liabilities.

A period of slow economic growth accompanied by high unemployment and rising prices.

A situation in which the Federal Reserve Board wants to increase interest rates, by decreasing the money supply. To do this the Fed would sell government securities to primary dealers or raise the discount rate and/or reserve requirement. This action will help curb inflation and prevent the economy from overheating.

Occurs when a country has more imports than exports.

Occurs when a country has more exports than imports.

One of the four stages of the business cycle, in which a contraction reaches its lowest point and begins to turn into an expansion.

An economic measure that details the percentage of individuals in the labor force who are without work.

When the rates of returns between bonds with different quality ratings increase, forecasting a greater risk of default on lower-grade bonds.

A graph that plots the relationship between interest rates and time until maturity, which provides an idea of future interest rate expectations and predicts changes in economic output and growth.

The difference in the quoted rates of return between two types of bonds. Yield spread provides an indication of the increased return for investing in one type of bond over another.

Flat Yield Curve

Inverted Yield Curve

Longer Maturity = Higher Yield

balance of trade

an extreme increase in the nation’s inflation rate

balance of trade surplus

Reflects the difference between a company’s assets and liabilities and can be calculated as:

Total Assets - Total Liabilities = Shareholders Equity

Rights offering is a capital raise where existing shareholders are given the right to purchase additional shares, proportionate to their current holdings in order to avoid dilution.

• Market Risk - the risk that the performance of an individual security will be impacted by the performance of the overall market
• Business Risk - the risk that the the performance of an investment is negatively impacted by company’ management and other company specific factors

• Growth - Stocks that reinvest most of their earnings to their business in order to grow the value over time
• Income - Stocks that regularly pay income in the form of dividends
• Defensive - Stocks that are resistant to changes in the business cycle
• Cyclical - Stocks that mirror the performance of the conomy

balance sheet

Unrealized capital gains

systematic risk

liabilities

Recession

Shareholder’s equity