FIN 310 REVIEW ALL TIPS QUESTIONS AND
ANSWERS SURE A+
✔✔How the Fed's monetary policy affects the unemployment level - ✔✔The Fed's
monetary policy affects interest rates, which affect the cost of borrowing by households
and businesses, and therefore affect their level of spending for products and services.
The aggregate demand for products and services affects the number of people
employed by businesses and therefore affects the unemployment level.
✔✔How Fed affects payments on homes - ✔✔- when fed decreases interest rates,
mortgages on homes becomes cheaper and the demand for them increases
- when fed increases interest rates, mortgages become more expensive and the
demand for them decrease
✔✔Fed's monetary policy might indirectly affect the prices of equity securities - ✔✔The
Fed's monetary policy influences the aggregate demand for products and services, and
therefore affects the cash flows generated by publicly-traded businesses. The value of
the stock of a business is influenced by expectations of its future cash flows.
✔✔Impact of FOMC Statement - ✔✔a statement was not provided, investors would
have to guess at the conclusion of the FOMC meeting, and there would be more
uncertainty regarding the Fed's future monetary policy. The statement makes the Fed's
plans more transparent.
✔✔Impact of how Fed's facility programs improved liquidity in some debt markets -
✔✔the Fed established facilities that provided loans to financial institutions that were
willing to invest in some types of debt securities, such as bonds that were backed by
consumer loans. In this way, the Fed increased the liquidity of these markets, which
allowed easier access for consumers who wanted to borrow funds. The Fed also used
some of its own funds to purchase commercial paper, which restored the liquidity of the
commercial paper market.
,✔✔Consumer Financial Protection Bureau- result of the financial reform act of 2010 -
✔✔The bureau is responsible for regulating financial products and services, including
online banking, certificates of deposit, and mortgages. The existence of a bureau can
act more quickly to protect consumers from deceptive practices than waiting for
Congress to pass new laws.
✔✔TALF - ✔✔term-asset backed facility that the Fed created in 2008 to provide
financing to financial institutions purchasing high-quality bonds backed by consumer,
credit card, or automobile loans
By providing financing to institutions that purchased these loans, TALF increased the
market's liquidity and thus indirectly encouraged lenders to make more consumer loans.
✔✔Fed's quantitative easing strategy - ✔✔Intended to increase liquidity in specific
markets for risky debt securities, and to reduce long-term interest rates.
✔✔Can the Fed prevent US recessions? - Yes viewpoint - ✔✔Yes, the Fed has the
power to reduce market interest rates and can use such adjustments to encourage
more borrowing and spending. In this way, it stimulates the economy.
✔✔Can the Fed prevent US recessions?-NO viewpoint - ✔✔No- When the economy is
weak, individuals and firms are unwilling to borrow regardless of the interest rate. As a
consequence, borrowing (by those who are qualified) and spending will not be
influenced by the Fed's actions. The Fed should not intervene, but rather let the
economy work itself out of a recession.
✔✔How does the Fed's monetary policy affect economic conditions? - ✔✔The Fed's
monetary policy can affect the supply of loanable funds available in financial markets
and therefore may affect interest rates. It may also affect inflation (with a lag) and
therefore affect the demand for loanable funds by influencing inflationary expectations.
✔✔Stimulative Monetary Policy effects - ✔✔may increase economic growth, reduce
unemployment, but may increase inflation
✔✔Restrictive Monetary Policy - ✔✔may keep inflationary pressure low, may cause low
economic growth, higher unemployment
✔✔When to use a stimulative monetary policy - ✔✔stimulative monetary policy may be
used to stimulate the economy, especially if inflation is not a concern.
may result in higher inflation
✔✔Risk of restrictive monetary policy - ✔✔A restrictive monetary policy may be used to
slow economic growth in order to reduce inflationary fears.
, Risk of a restrictive monetary policy is a potential slowdown in the economy. A
restrictive monetary policy may result in higher interest rates, reduced borrowing, and
reduced spending to an excessive degree.
✔✔active monetary policy - ✔✔an active monetary policy reflects actions taken by the
Fed to adjust money supply in order to affect economic conditions.
✔✔Passive Monetary Policy - ✔✔passive monetary policy means that the Fed does not
attempt to adjust money supply in order to improve economic conditions.
✔✔Fed Control- Why might the Fed have difficulty in controlling the economy in the
manner desired? - ✔✔The Fed has difficulty in controlling the economy because it
cannot always maintain money growth within its target boundaries. In addition, the
impact of monetary growth on the economy may be different than what was anticipated.
✔✔Recognition Lag - ✔✔The recognition lag represents the time from when a problem
exists until it is recognized by the Fed. It occurs because the economic statistics that
are monitored to detect problems are only reported periodically.
✔✔Implementation Lag - ✔✔The implementation lag occurs when the Fed recognizes a
problem but does not implement a policy to solve the problem until later.
✔✔Assume that the Fed's primary goal is to reduce inflation. How can it achieve its
goal? What is a possible adverse effect of such action by the Fed (even if it achieves
this goal)? - ✔✔TO cure inflation, the Fed may use a restrictive monetary policy, which
will reduce economic growth and inflationary pressure. A possible adverse effect is an
increase in the unemployment rate.
✔✔Why do financial market participants closely monitor money supply movements? -
✔✔Money supply movements can affect interest rates and other economic variables
that influence security prices. Therefore, financial market participants can monitor
money policy to develop forecasts of future security prices.
✔✔What happens when financial market participants incorrectly forecast money supply
movements? - ✔✔Financial market participants may incorrectly forecast money supply
movements, causing them to incorrectly forecast economic variables. Yet, even if they
forecast money supply movements correctly, they may incorrectly anticipate the impact
of money supply movements on economic variables.
✔✔Describe the Fed's monetary policy response to thecredit crisis that began in 2008. -
✔✔The Fed used a stimulative monetary policy during the credit crisis because
economic conditions were very weak. Specifically, the Fed's policy resulted in lower
interest rates in the U.S.
ANSWERS SURE A+
✔✔How the Fed's monetary policy affects the unemployment level - ✔✔The Fed's
monetary policy affects interest rates, which affect the cost of borrowing by households
and businesses, and therefore affect their level of spending for products and services.
The aggregate demand for products and services affects the number of people
employed by businesses and therefore affects the unemployment level.
✔✔How Fed affects payments on homes - ✔✔- when fed decreases interest rates,
mortgages on homes becomes cheaper and the demand for them increases
- when fed increases interest rates, mortgages become more expensive and the
demand for them decrease
✔✔Fed's monetary policy might indirectly affect the prices of equity securities - ✔✔The
Fed's monetary policy influences the aggregate demand for products and services, and
therefore affects the cash flows generated by publicly-traded businesses. The value of
the stock of a business is influenced by expectations of its future cash flows.
✔✔Impact of FOMC Statement - ✔✔a statement was not provided, investors would
have to guess at the conclusion of the FOMC meeting, and there would be more
uncertainty regarding the Fed's future monetary policy. The statement makes the Fed's
plans more transparent.
✔✔Impact of how Fed's facility programs improved liquidity in some debt markets -
✔✔the Fed established facilities that provided loans to financial institutions that were
willing to invest in some types of debt securities, such as bonds that were backed by
consumer loans. In this way, the Fed increased the liquidity of these markets, which
allowed easier access for consumers who wanted to borrow funds. The Fed also used
some of its own funds to purchase commercial paper, which restored the liquidity of the
commercial paper market.
,✔✔Consumer Financial Protection Bureau- result of the financial reform act of 2010 -
✔✔The bureau is responsible for regulating financial products and services, including
online banking, certificates of deposit, and mortgages. The existence of a bureau can
act more quickly to protect consumers from deceptive practices than waiting for
Congress to pass new laws.
✔✔TALF - ✔✔term-asset backed facility that the Fed created in 2008 to provide
financing to financial institutions purchasing high-quality bonds backed by consumer,
credit card, or automobile loans
By providing financing to institutions that purchased these loans, TALF increased the
market's liquidity and thus indirectly encouraged lenders to make more consumer loans.
✔✔Fed's quantitative easing strategy - ✔✔Intended to increase liquidity in specific
markets for risky debt securities, and to reduce long-term interest rates.
✔✔Can the Fed prevent US recessions? - Yes viewpoint - ✔✔Yes, the Fed has the
power to reduce market interest rates and can use such adjustments to encourage
more borrowing and spending. In this way, it stimulates the economy.
✔✔Can the Fed prevent US recessions?-NO viewpoint - ✔✔No- When the economy is
weak, individuals and firms are unwilling to borrow regardless of the interest rate. As a
consequence, borrowing (by those who are qualified) and spending will not be
influenced by the Fed's actions. The Fed should not intervene, but rather let the
economy work itself out of a recession.
✔✔How does the Fed's monetary policy affect economic conditions? - ✔✔The Fed's
monetary policy can affect the supply of loanable funds available in financial markets
and therefore may affect interest rates. It may also affect inflation (with a lag) and
therefore affect the demand for loanable funds by influencing inflationary expectations.
✔✔Stimulative Monetary Policy effects - ✔✔may increase economic growth, reduce
unemployment, but may increase inflation
✔✔Restrictive Monetary Policy - ✔✔may keep inflationary pressure low, may cause low
economic growth, higher unemployment
✔✔When to use a stimulative monetary policy - ✔✔stimulative monetary policy may be
used to stimulate the economy, especially if inflation is not a concern.
may result in higher inflation
✔✔Risk of restrictive monetary policy - ✔✔A restrictive monetary policy may be used to
slow economic growth in order to reduce inflationary fears.
, Risk of a restrictive monetary policy is a potential slowdown in the economy. A
restrictive monetary policy may result in higher interest rates, reduced borrowing, and
reduced spending to an excessive degree.
✔✔active monetary policy - ✔✔an active monetary policy reflects actions taken by the
Fed to adjust money supply in order to affect economic conditions.
✔✔Passive Monetary Policy - ✔✔passive monetary policy means that the Fed does not
attempt to adjust money supply in order to improve economic conditions.
✔✔Fed Control- Why might the Fed have difficulty in controlling the economy in the
manner desired? - ✔✔The Fed has difficulty in controlling the economy because it
cannot always maintain money growth within its target boundaries. In addition, the
impact of monetary growth on the economy may be different than what was anticipated.
✔✔Recognition Lag - ✔✔The recognition lag represents the time from when a problem
exists until it is recognized by the Fed. It occurs because the economic statistics that
are monitored to detect problems are only reported periodically.
✔✔Implementation Lag - ✔✔The implementation lag occurs when the Fed recognizes a
problem but does not implement a policy to solve the problem until later.
✔✔Assume that the Fed's primary goal is to reduce inflation. How can it achieve its
goal? What is a possible adverse effect of such action by the Fed (even if it achieves
this goal)? - ✔✔TO cure inflation, the Fed may use a restrictive monetary policy, which
will reduce economic growth and inflationary pressure. A possible adverse effect is an
increase in the unemployment rate.
✔✔Why do financial market participants closely monitor money supply movements? -
✔✔Money supply movements can affect interest rates and other economic variables
that influence security prices. Therefore, financial market participants can monitor
money policy to develop forecasts of future security prices.
✔✔What happens when financial market participants incorrectly forecast money supply
movements? - ✔✔Financial market participants may incorrectly forecast money supply
movements, causing them to incorrectly forecast economic variables. Yet, even if they
forecast money supply movements correctly, they may incorrectly anticipate the impact
of money supply movements on economic variables.
✔✔Describe the Fed's monetary policy response to thecredit crisis that began in 2008. -
✔✔The Fed used a stimulative monetary policy during the credit crisis because
economic conditions were very weak. Specifically, the Fed's policy resulted in lower
interest rates in the U.S.
