Series65 MOD 11 Economics Risk and Market Analysis
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What are the 3 methods of controlling the economy are:
- Open market operations
- Discount rate
- Reserve requirement;The Fed will only manipulate the reserve requirement in drastic times and for only very short periods (1-2 days).
FOMC stands for:
- Federal Open Market Committee (FOMC).
- The FOMC controls the money supply by buying and selling U.S. government securities in the open market
Define Moral Suasion:
Moral Suasion is the unofficial method of controlling the money supply.
Continue the sequence of events:
The FOMC is buying, interest rates go down
Treasury prices go up due to demand for Treasury securities. More money goes into economy lowering interest rates
FEDERAL FUNDS RATE is the:
interest rate that commercial banks charge when borrowing from each other to meet the overnight reserve requirement. Sometimes called the OVERNIGHT LENDING RATE
The Fed funds rate is the most:
volatile of all the interest rates because it changes rapidly each day
The Fed controls the money supply by changing the ___________
If the Fed increases or decreases the reserve requirement, it has a ___________
multiplier effect on the money supply
To stimulate Deflation, how does the FED decrease the flow of money by taking money out of the market:
- 1: Buying and selling Treasury securities in the open market
- 2: Raising the discount rate
- 3: Raising the reserve requirement
M1 is composed of:
- All currency in circulation
- Demand deposits
- Interest-bearing checking accounts
- Money market funds
M2 is all of M1 plus:
- Small savings
- small time deposits
- Overnight repurchase agreements
- Overnight Eurodollar deposits
M3 is all of M2 plus:
- Large time deposits in commercial and savings banks and savings and loans
- Liquidity includes M3 plus liquid assets held by individuals
A RECESSION is a:
short-term decline (2 consecutive quarters) in business activity, stock prices, and employment
A DEPRESSION is defined as:
at least 18 months of decline in business activity, stock prices, and employment
The PRIME RATE is the:
rate the banks charge their business customers, and is dependent upon the demand for money.
The REAL INTEREST RATE is:
the difference between the interest on the borrowing of money and the inflation rate.
In Fluctuating interest rates how do short term/long term react:
- Short-term bonds react more quickly;
- Long-term bonds adjust their prices more
When the U.S. dollar loses value, exports become:
more competitive in foreign and home markets, and foreign goods become less competitive.
When the U.S. dollar increases in value, or if the exchange rate increases, U.S. goods become:
less competitive and foreign goods become more competitive.
Explain expanding economy
- usually becomes inflationary
- the purchasing power of the dollar decreases
- interest rates rise
- secondary market bond prices fall
The Interbank Market determines the:
current rate of foreign exchange between currencies of different countries
it is most effective for the Fed to change interest rates and the money supply when seeking to influence the direction of the economy.
This theory holds that tax cuts leave more money in people’s pockets, thus encouraging more spending and increasing growth
- The supply side theory is the reverse of the Keynesian theory, in that it proposes that good fiscal policy, tax cuts, and less government spending generates a healthy economy.
- The supply side theory holds that the government should take a passive role rather than an active role in the economy
Keynesian theory holds that:
an economy can only grow with spending and consumption. For this reason, the Keynesian theory holds that the government must increase taxation and spending to motivate the economy.
The 3 main economic theories regarding how our economy is influenced are:
- Supply side
- Standard and Poor’s 500 stock index
- Housing Starts
- Consumer Goods purchases
- Machine Tool Orders
- Barron's Consumer Confidence Index
- Investor sentiment
3 economic indicators are
- LEADING INDICATORS: what the economy will do
- COINCIDENTAL INDICATORS: react with the economy
- LAGGING INDICATORS: what the economy has done
4 parts of the business cycle are:
The INDUSTRIAL PRODUCTION INDEX
The two major causes of inflation are:
COST-PUSH is defined as:
higher costs of production (e.g., wages) pushing up prices. When the manufacturing industry’s costs increase, it passes these higher costs on to the retailers. This increases prices, creating inflation.
The CONSUMER PRICE INDEX (CPI) reflects:
average prices of specific goods and services purchased by average consumers in major cities across the United States, as compared to the cost of those same goods in a base period
CPI is sometimes referred to as:
the MARKET BASKET THEORY
is excess money "chasing" goods. Since more people have money and want to buy, sellers increase prices, creating inflation
The 4 parts of the business cycle are:
A technical analyst looks at:
- what is happening in the stock market in general and the individual price action of stocks in similar industries:
- Dow theory
- Odd-lot theory
- Advance-decline theory
- Short interest theory
The BETA COEFFICIENT is a measure of:
the market’s volatility
The ALPHA COEFFICIENT is a measure of:
the company’s volatility
FUNDAMENTAL ANALYSTS look at:
- different aspects of a company to determine how the stock will do:
- Company outlook
- Research abilities
- Balance sheet
- Annual report
- Financial ratios
BULL MARKET is a market on the rise or in an upswing. Investors can take 3 positions that are always considered bullish:
- Owning stock or being “long the stock"
- Owning calls or being “long calls”
- Writing or selling puts or being “short puts
A BEAR MARKET is a market that is falling or on a downswing. Investors can take 3 positions that are always considered bearish:
- Selling stock “short” or being in a “short position”
- Buying puts or being “long puts”
- Writing or selling calls or being “short calls”
The "head and shoulders" top formation is a reversal of an upward trend, meaning:
the start of a bear market
The "head and shoulders" bottom formation is a reversal of a downward trend, meaning
the start of a bull market
A RESISTANCE LEVEL is the:
highest level to which a stock will rise.
A SUPPORT LEVEL is the:
lowest level to which a stock will fall.
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