The Risk and Term Structure of Interest Rates
1. Bond ratings summarize the likelihood that a bond issuer will meet its payment obligations.
a. Highly rated investment-grade bonds are those with the lowest risk of default.
b. If a firm encounters financia
The Central Bank Balance Sheet and the Money Supply Process
1. The central bank uses its balance sheet to control the quantity of money and credit in the
a. The central bank holds assets and liabilities to meet its responsibilities as the
The Structure of Central Banks: The Federal Reserve and the European Central Bank
1. The Federal Reserve System is the central bank of the United States. Its decentralized
structure comprises three primary elements:
a. Twelve Federal Reserve Banks, each w
Applying the Concept: The Fed after Alan Greenspan
Monetary policy under Alan Greenspan has been exemplary. Since the early 1990s, growth has
been higher and inflation lower than before he took the helm at the Fed in 1987. Moreover, both
Central Banks in the World Today
1. 1. The functions of a modern central bank are to
a. Adjust interest rates to control the quantity of money and credit in the economy.
b. Operate a payments system.
c. Lend to sound banks during times of stress.
Regulating the Financial System
1. The collapse of banks and the banking system disrupts both the payments system and the screening
and monitoring of borrowers.
a. Intermediaries fail when their liabilities exceed their assets.
b. Because banks guarantee
Financial Industry Structure
1. The United States has a comparatively large but declining number of banks.
a. The large number of banks in the United States is explained by restrictions on branching, both within
and across state lines, that were imposed b
Applying the Concept: Privatizing Social Security
President George W. Bush spent much of the winter of 2005 traveling around the country trying
to convince people that the Social Security system needs to be reformed. Unless something
Depository Institutions: Banks and Bank Management
1. Bank assets equal bank liabilities plus bank capital.
a. Bank assets are the uses for bank funds.
i. They include reserves, securities, and loans.
ii. Over the years, securities have become less import
Monetary Policy: Stabilizing the Domestic Economy
1. The Federal Reserve has four conventional monetary policy tools.
a. The target federal funds rate is the primary instrument of monetary policy.
i. Open market operations are used to control the federal
Modern Monetary Policy and the Challenges Facing Central Bankers
1. Monetary policy influences the economy through several channels.
a. The traditional channels of monetary policy transmission are interest rates and
i. Interest rates influ
Applying the Concept: Housing Bubbles and Monetary Policy
The housing market is hot, and people are getting worried. For the year ending April 2005,
prices of existing homes in the U.S. rose more than 15 percent. Thats more than four times the
Applying the Concept: Is it a Recessionary Gap or a fall in Potential Output?
Throughout the 1960s, GDP growth had averaged more than 4 percent per year. But then in
1974, the economy contracted by nearly 3 percent. Thats a very severe recessio
Understanding Business Cycle Fluctuations
1. Short-run fluctuations in output and inflation arise from shifts in either the dynamic
aggregate demand curve or the short-run aggregate supply curve.
a. A decrease in the central bank's inflation target shifts
Output, Inflation, and Monetary Policy
1. In the long run
a. Current output equals potential output, which is the level of output the economy produces when its
resources are used at normal rates.
b. Inflation equals money growth minus growth in potential
Money Growth, Money Demand, and Modern Monetary Policy
1. There is a strong positive correlation between money growth and inflation.
a. Every country that has had high rates of sustained money growth has experienced
high rates of inflation.
b. At very hig
Exchange-Rate Policy and the Central Bank
1. When capital flows freely across a country's borders, fixing the exchange rate means giving
up domestic monetary policy.
a. Purchasing power parity implies that in the long run, exchange rates are tied to