Question

DEFINE THE FOLLOWING TERMS AND CONCEPTS IN A CLEAR, CONCISE, AND EXPLICIT WAY

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DEMONSTRATE THE RELATIONS BETWEEN THEM!

• Monetary - fiscal policy mix & confidence band;

• Shadow banking & leverage;

• Subprime mortgages & collateralized debt obligations (CDOs);

• Trouble Asset Relief Program (TARP) & American Recovery and Reinvestment Act;

• Permanent and life cycle income theories of consumption & Keynesian consumption function;

• Tobin's q & user or rental cost of capital;

• Animal spirits & rational expectations;

• Reservation wage; Efficiency Wages;

• Labor market rigidities & wage indexation;

• The wage setting relation & The Price Setting Relation;

• Natural rate of unemployment & Non-accelerating inflation rate of unemployment (NAIRU);

• The Philips Curve (original) & The Accelerationist Philips Curve;

• Potential output & Natural rate of interest;

• Deflation spiral & stagflation

Answer 1

• A shadow banking system refers to the financial intermediaries involved in facilitating the creation of credit across the global financial system but whose members are not subject to regulatory oversight. The shadow banking system also refers to unregulated activities by regulated institutions.
• Leverage is the investment strategy of using borrowed money: specifically, the use of various financial instruments or borrowed capital to increase the potential return of an investment. Leverage can also refer to the amount of debt used to finance assets.
• Monetary policy is the macroeconomic policy laid down by the central bank. It involves management of money supply and interest rate and is the demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity.
• Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy. It is the sister strategy to monetary policy through which a central bank influences a nation's money supply. These two policies are used in various combinations to direct a country's economic goals.
• A subprime mortgage is a type of loan granted to individuals with poor credit scores (640 or less, and often below 600), who, as a result of their deficient credit histories, would not be able to qualify forconventional mortgages. Because subprime borrowers present a higher risk for lenders, subprime mortgages usually charge interest rates above the prime lending rate.

• CDOs, or collateralized debt obligations, are financial tools that banks use to repackage individual loans into a product sold to investors on the secondary market. These packages consist of auto loans, credit card debt, mortgages or corporate debt. They are called collateralized because the promised repayments of the loans are the collateral that gives the CDOs their value.
• The Troubled Asset Relief Program(TARP) is a program of the United States government to purchase toxic assets and equity from financial institutions to strengthen its financial sector that was signed into law by President George W. Bush on October 3, 2008.
• The American Recovery and Reinvestment Act of 2009 (ARRA) (Pub.L. 111–5), nicknamed theRecovery Act, was a stimulus package enacted by the 111th U.S. Congress and signed into law by President Barack Obama in February 2009.