MONEY
1. What is Money? Wealth? Income?
2. Define M1, M2?
3. What are the functions of money?
4. Why are the advantages of an economy using money rather than barter?
5. What is barter and what are the shortcomings of barter?
6. Distinguish between commodity money, full-bodies representative money, fiat money
7. What are some key milestones in the evolution of money in the U.S.?
8. What is seignorage? Gresham's law?
9. What is liquidity?
10. What is the payments system?
MONETARY THEORY
1. What determines aggregate prices and output?
2. What determines interest rates in the short-run?
3. How does fiscal policy affect the economy? Graph, "arrow" diagram.
4. How does the stock market affect the economy? Graph, "arrow" diagram.
5. How does money "matter" (impact the economy) in the short-run? Graph, "arrow" diagram.
6. What are some additional channels by which money impacts the economy? Graph, "arrow" diagram.
7. What is Keynesian liquidity preference? The speculative demand for money?
8. What is the liquidity trap? Why does it matter? What is the zero-lower bound?
9. What is inflation and what can cause it in the short-run? Graph, arrow diagram
10. What is the short-run Phillips curve and why is it important? Graph, "arrow" diagram.
11. What is a Keynesian explanation of the cause of the recent recession?
MONETARY TRANSMISSION
1. Channels, including: interest rate, international, Tobins's q, wealth effect, narrow and broad credit channels, portfolio/balance sheet effects, asymmetric information issues
2. What is the liquidity trap (zero-lower bound)?
3. What is meant by the Fed's inability to "push on a string"
4. What is quantitative easing? Why does it matter?
5. What role does asymmetric information play in monetary transmission (broad credit channel - in tough economic times, lenders ability to evaluate borrowers is decreased thus reducing borrowing; conversely, fed expansionary policy can improve conditions, reduce the information asymmetry, and increase lending)
THE FED AND CONTROL OF THE MONEY SUPPLY
1. What is the Fed?
2. What is the Structure of the Fed - Board of Governors, FOMC, District banks, Manager, System Open Market Account, etc.
3. What the reasons, basis, and controversy over the Fed's independence.
4. Compare the Fed to the ECB.
5. Using arrow diagram explain how a Fed open market purchase increases the money supply showing each step.
6. What are the monetary base and the monetary base multiplier?
7. How does the base multiplier model explain money supply behavior in the crisis of 2007?
8. Why does the Fed's balance sheet matter?
9. What are some key items on the asset side of the Fed's balance sheet? The liability side?
10. How are checks cleared, very roughly?
11. How/why do open market operations impact interest rates?
12. What determines the effective fed funds rate?
13. What determines the floor and ceiling on the effective fed funds rate?
MONETARY POLICY
1. How does monetary policy impact the economy?
2. What are the goals, tools/instruments, targets of the Fed?
3. How does the discount window work, roughly
4. How do FOMC meetings ‘work' and what is the directive and how does the system open market desk carry out monetary policy
5. Characterize the lags in monetary policy
6. What is the debate between rules and discretion in monetary policy? Pro's and con's of rules; pro's and con's of discretion
7. What monetary growth rule has been suggested by Friedman and others, and why?
8. What's the Taylor rule? What does it suggest in the current economic climate?
9. What effect do government budget deficits have on inflation? (in the long-run, none UNLESS financed by expansion of the money supply)
10. What is the idea of the political business cycle (that some of the ‘ups and downs' in economic activity may be related to political considerations -i.e., the party in power may engage in policy to enhance their reelection prospects - no evidence for monetary policy, pretty strong evidence for fiscal policy)?
11. What is the role of credibility in Fed policy? Transparency?
12. What does rational expectations model imply about monetary policy?
13. What is inflation targeting? What is a nominal anchor?
14. 2 Facts (each) about Monetary Policy in the
a. 60's - over expansionary 9according to Taylor rule) - set the stage for inflation
b. 70's had to deal with supply shocks from oil - stagflation, continuing and worsening inflation
c. 80's - Volcker's Fed overtightened but ended inflation and regained credibility
d. 90's -golden period, Greenspan's fed allowed strong, non-inflationary economic expansion and dealt with several crises well, but perhaps fell down on the regulatory front
e. 2000-present - Greenspan dealt well with Enron and 9/11 but regulatory failures. Bernanke come in to the beginning of the worst crisis since the great depression and after a slow start, took bold, innovate actions which likely ‘saved the day'
15. What innovative policies and tools did the Fed implement in the recent financial crisis? Aggressive use of lender of last resort, lending to bank and then nonbank financial institutions, firms, and individual markets; used QE for first time in U.S. and increased communications (forward guidance etc) to shape market expectations;
16. What's meant by the Fed's exit strategy? What are 3 elements of it? Transition from unconventional policy back to ‘normal'; interest on excess reserves, overnight reverse repos; allowing existing bonds etc to mature
17. Why can't the Fed (and the ECB) buy government bonds directly from the government? Would be akin to ‘printing money' - purely inflationary
18. How do Fed actions affect the long-run real interest rate?
Banking
1. What's meant by asymmetric information, moral hazard, adverse selection, and what do these have to do with banking?
2. What's the lemon problem, and what does it have to do with banking?
3. How are banks funded (where do they get the funds the lend)?
4. How do banks transform assets - 2 examples?
5. What is meant by maturity mis-match?
6. What are the major elements of Banks' Assets? Liabilities?
7. How do Banks manage: liquidity, assets, liabilities, risk (credit, interest rate, trading)?
8. What are off-balance sheet activities? Why do they matter?
9. How many central banks has the U.S. had? What was the free-banking era and why?
10. Describe the structure of banking in the U.S. - types of depository institutions, chartering and regulatory organizations
11. What is, and why do we have, a dual banking system? How does this compare to Canada, UK, etc?
12. What are some examples of, and explanations for financial innovation?
13. Why and how are banks regulated?
14. What was Glass-Steagall, and why was it enacted, and later removed?
15. What was Gramm-Leach-Bliley?
16. What were the causes and consequences of the Savings and Loan crisis? The Banking crisis? The recent financial crisis?
17. What's CAMELS?
18. What are/were Basel 1-3?
19. Why do banks hold capital?
20. How does capital affect bank profitability?
21. How has the FDIC changed banking?
22. How has Dodd-Frank impacted Banks?
23. What is the Volcker rule?
24. What is asset management? Liability management? Liquidity management?
25. What is credit risk? Interest rate risk? Duration? Basic gap analysis?
26. What was regulation Q?
THE FINANCIAL SYSTEM
1. What is the economic role of the financial system?
2. What is the ‘punch line' of the lemons problem?
3. What are: primary markets, secondary markets, exchanges, dealer markets, dealers, financial intermediaries? Money market? Capital market? market makers, alternate trading systems
4. Who regulates financial markets and how?
5. SEC, CFTC, FED, FDIC, OCC, FINRA, SRO (self-regulatory organization) NRSRO (nationally recognized statistical rating organization) - what are they?
6. What do we mean by efficient markets? Random walks? What are the implications of this?
7. What are thrifts?
8. What are 3-4 key aspects of Dodd-Frank?
9. 2-3 key points of Sarbanes Oxley?
10. What are shadow banks?
11. What is the Financial Stability Oversight Council?
INTEREST RATES be prepared to do simple calculations
1. Define and calculate present and future value. equation
2. What is the relation between present value and term and interest/discount rate?
3. What is yield to maturity, how to calculate it, why? equation
4. What is current yield, holding period yield, yield to call.
5. Calculating bond prices and yields for coupon, zero coupon, and perpetual bonds (consols) equation
6. What is the relation between bond price, maturity, and yield.
7. What is relation between real and nominal interest rates. Equation
8. What is the relation between nominal interest rates, risk free rates and risk premiums?
9. What is the relationship between the demand and supply for money approach, the demand and supply for bonds approach, and the loanable funds approach to explaining ‘the' overall interest rate?
10. Three possible reasons for interest rates on different instruments to differ?
11. What is the risk structure of interest rates?
12. What's a junk bond? An investment grade bond? Who rates bonds?
13. What is meant by the term structure of interest rates?
14. Why is the yield curve generally upward sloping?
15. What does a downward sloped (inverted) yield curve indicate?
16. Why do Muni's (S&L:s) generally have lower yields than treasuries?
17. What's different about tbills as compared to treasury notes and bonds.
18. What's a TIPS?
19. Does increasing the money supply lower interest rates in the SR? the LR?
INVESTMENT RELATED
1. What are Stocks?
2. What is the major reason people buy stock?
3. What is leverage, liquidity, buying on margin, selling short?
4. What are the roles of dividends and risk-adjusted discount rate in determining the fundamental price of a stock?
5. What is a speculative bubble?
6. How do stocks compare to bonds?
7. How do you pick good stocks? How does Buffet?
8. What is the advantage of diversification?
9. What is the efficient markets hypothesis, and how does it relate to random walks?
10. What are Bonds? Bond Ratings, Junk Bonds, Treasury Bonds, Corporate Bonds, Muni/S&L Bonds?
11. What are Mutual Funds?
12. What is a non-load stock index mutual fund?
13. What's an ETF? A hedge fund?
14. What are derivatives?
15. List the 3 ‘types' of uses of options and futures.
16. Compare options and futures.
17. What are: puts, calls, Black-Scholes formula, credit default swaps, mortgage backed securities, cdos?
INTERNATIONAL
1. What is the idea of comparative advantage? Why is trade ‘good'?
2. How does a strong currency affect the domestic economy?
3. What are the determinants of exchange rates in the short-run? In the long-run?
4. What is purchasing power parity theory?
5. Why do we have a current account deficit, and what does it imply?
6. How do fixed exchange rates work?
7. How does a gold standard work?
8 Which are ‘better', floating or fixed rates?
9. What impact do capital controls have?
10. What is: Bretton woods, IMF, WTO, BIS
11. Why do we have a capital/financial account surplus and what does it imply?
12. What is the ‘twin deficit problem'?
13. What is the tri-lemma? How does it explain China's dilemma?
14. What are the advantages of floating exchange rates? Fixed exchange rates?
15. How do open-economy considerations impact monetary policy?