ECON330 Exam 3 SG

What role did the global pool of money play in the housing bubble?

"Growth of pool went looking for a place to save money and got attracted to mortgage backed securities, which require more mortgages, which lead to the relaxing of mortgage standards"

If you expect the inflation rate to be 15% next year and a one-year bond has a yield to maturity of 7%, then the real interest rate on this bond is a. 7% b. 22% c. -15% d. -8%

-8%

Financial intermediaries lower transaction costs by providing what two things?

1) Economies of scale- financial intermediaries have expertise in lowering transaction costs and their large size allows them to reduce transaction costs per dollar as the size (scale) of transactions increases (banks can use information over and over again to check credit) 2) Able to draft single contract for a single cost & use it for thousands of people as a universal contract, minimizing cost per contract.

Order the dynamics of a financial crisis from 1 to 4 price deflation debt deflation banking crisis credit and asset boom

1. credit and asset boom 2. banking crisis 3. debt deflation 4. price deflation

The U.S. got its first National Currency around the

1860s

Financial Security

A claim on the issuer's future income/assets

Commercial bank

A financial institution that accepts demand deposits and makes loans and provides other services for the public

Insurance Company

A financial institution that protects persons against the risk of financial loss.

Federal Government

A form of government in which powers are divided between a central government and several local governments.

Who was the first Treasury Secretary of the United States?

Alexander Hamilton

M2

All of M1 + less immediate (liquid) forms of money to include savings, money market mutual funds, and small denomination time deposits.

Why do bank runs occur?

Asymmetric information

The Federal Reserve was created after the crisis surrounding

Banking Panics of the early 1900s

What are the three major parts of the Federal Reserve System

Board of Governors, Federal Open Market Committee, and Direct Banks

Saver

Consumes less than their income

Which entity of The Federal Reserve System is responsible for establishing open market operations?

FOMC

Fiscal Policy

Government policy that attempts to manage the economy by controlling taxing and spending. -government spending and taxes to affect the macro economy

Monetary Policy

Government policy that attempts to manage the economy by controlling the money supply and thus interest rates.

Interest Rate

Percentage of amount borrowed to be added to the amount loaned and paid back -price of impatience

The Troubled Asset Relief Program (TARP) authorized the Treasury to: a. Take over commercial banks\ b. Merge troubled financial institutions c. Regulation financial institutions d. Purchase subprime mortgage assets e. all of the above

Purchase subprime mortgage assets

What makes QE, QE2, QE3, different from normal Fed activity?

Quantitative easing refers to the fed buying long-term debt instruments rather than short-term bonds.

Things that affect exchange in the long-run

Relative price levels (inflation rate) Trade barriers Preferences for domestic and foreign goods Relative productivity levels

Things that affect exchange rate in the short-run

Risk adjusted Real interest rate

mortgage-backed securities

Securities that cheaply bundle and quantify the default risk of the underlying high-risk mortgages

The Fed usually conduct open market operations using a. Short term treasury debt b. Mortgage backed securities c. Corporate bonds d. Foreign bonds e. All of the above f. None of the above

Short term treasury debt

Investor

Someone who commits capital in order to gain financial returns

Which entity in the Federal Reserve System controls the discount rate?

The Board of Governors

Which entity in the Federal Reserve System sets reserve requirements?

The Board of Governors

How did competitive forces lead to the repeal of the Glass-Steagall Act's separation of the banking and securities industries?

The Fed allowed bank holding companies to enter the underwriting business

What three parties play a role in determining the money multiplier and thus the money supply?

The Fed, Commercial Banks, Depositors

Financial Regulation

The rules that govern how financial services providers operate and deal with their customers.

Describe the process of securitization

To transform otherwise illiquid financial assets into marketable capital market securities. In other words, to bundle a set of illiquid investments (like mortgages) into a new asset which can be bought and sold freely (in the same way you might with an index fund).

What is the global pool of money?

Total world savings subset of global savings known as fixed-income securities

What is the key disadvantage of commodity money (not a characteristic)

We are independent on finate resources and cannot control the supply

Which of the following can be described as involving indirect finance? a. You buy a U.S. Treasury bill from the U.S. Treasury at TreasuryDirect.gov b. You make a loan to your neighbor c. You buy shares in a mutual fund d. You purchase shares in an initial public offering by a corporation in the primary market

You buy shares in a mutual fund

Investment Bank

a financial intermediary that specializes in helping firms raise financial capital by issuing securities in primary markets

Which of the following is NOT a contractual savings institution? a. a pension fund b. a life insurance company c. a fire and casualty insurance company d. a savings and loan association

a savings and loan association

Which of the following factors apart from securitization was NOT responsible for the Great Recession of 2007-09? a. an increase in funds to lent to subprime borrowers b. a sudden rise in equity prices c. a decrease in federal funds rate

a sudden rise in equity prices a decrease in federal funds rate

Increasing the amount of information available to investors helps to reduce the problems of _______ and ______ in the financial markets a. adverse selection; risk sharing b. moral hazard; transactions cost c. adverse selection; moral hazard d. adverse selection; economies of scale

adverse selection; moral hazard

People, in general, do not lend money to one another to buy a house or car because: a. of information problems b. they do not know about the effort other people will provide to repay their debts c. they do not know about the capacity of other people to repay their debts d. all of the above

all of the above

Dealer

an agent who buys and sells securities from inventory

Central Bank

an institution designed to oversee the banking system and regulate the quantity of money in the economy -controls the money supply

As a result of strict banking regulations, the United States has:

banks that are quite large relative to those in other industrialized countries

M1

currency, demand deposits, traveler's checks, and other checkable deposits

An increase in RISK affects demand or supply? Shifts to the left or the right?

demand; left

An increase in LIQUIDITY affects demand or supply? Shifts to the left or the right?

demand; right

An increase in WEALTH affects demand or supply? Shifts to the left or the right?

demand; right

A ______ is bought at a price below its face value, & the _____ value is repaid at the maturity rate a. discount bond; discount b. coupon bond; discount c. coupon bond; face d. discount bond; face

discount bond; face

Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which it is sold are known as a. equity bonds b. foreign bonds c. country bonds d. eurobonds

eurobonds

The most comprehensive measure of aggregate output is a. gross domestic product b. national income c. net national product d. the stock value of the industrial 500

gross domestic product

What is the key disadvantage of fiat money

if we print too much money, we risk inflation

The interest rate falls when either the demand for bonds ______ or the supply of bonds ______ a. increases; decreases b. decreases; decreases c. increases; increases d. decreases; increases

increases; decreases

What is the solution to the key disadvantage of fiat money

independent central banks

Financial intermediary

institution that helps channel funds from savers to borrowers

What gives the Federal Reserve the ability to be so independent?

it has its own funding

Which of the following is NOT true of securitization? a. it is a process that converts high-risk financial instruments into default-free financial instruments b. it is a process that converts a series of financial instruments into marketable securities c. a process that drives the prices of financial instruments above their fundamental values

it is a process that converts high-risk financial instruments into default-free financial instruments a process that drives the prices of financial instruments above their fundamental values

Which of the following bonds would have the highest default risk? a. junk bonds b. investment-grade bonds c. U.S. Treasury bonds d. municipal bonds

junk bonds

In the bond market, the bond demanders are the ________ and the bond suppliers are the _________ a. borrowers; lenders b. lenders; borrowers c. lenders; advancers d. borrowers; advancers

lenders; borrowers

______ is the relative ease and speed with which an asset can be converted into a medium of exchange a. efficiency b. deflation c. specialization d. liquidity

liquidity

Financial intermediaries provide customers with liquidity services. Liquidity services a. are another term for asset transformation b. make it easier for customers to conduct transactions c. allow customers to have a cup of coffee while waiting in the lobby d. are a result of the asymmetric information problem

make it easier for customers to conduct transactions

Money Market

market in which money is lent for periods of less than a year -deal in short-term debt instruments

Kevin purchasing concert tickets with his debit card is an example of the ________ function of money. a. medium of exchange b. unit of account c. store of value d. specialization

medium of exchange

Three functions of money

medium of exchange, unit of account, store of value

The greatest period of financial regulation in the U.S. occurred in the

mid-1900s

What happens to money demand if RGDP falls

money demand decreases

What happens to money demand if price level falls

money demand decreases

What happens to money demand if transaction costs falls

money demand decreases

What happens to money demand if inflation falls

money demand increases

What happens to money demand if real interest rates falls

money demand increases

Commodity Money

money that takes the form of a commodity with intrinsic value

Fiat Money

money without intrinsic value that is used as money because of government decree

An example of the problem of ________ is when a corporation uses the funds raised from selling bonds to fund corporate expansion to pay for Caribbean cruises for all of its employees and their families. a. credit risk b. risk sharing c. adverse selection d. moral hazard

moral hazard

The Federal Reserve did NOT rescue the investment bank Lehman Brothers because of

moral hazard

The yield to maturity for a discount bond is _______ related to the current bond price a. not b. positively c. directly d. negatively

negatively

There is ________ for any bond whose time to maturity matches the holding period. a. no interest-rate risk b. yield-to-maturity risk c. a large interest-rate risk d. rate-of-return risk

no interest-rate risk

In order to reduce risk and increase the safety of financial institutions, commercial banks and other depository institutions are prohibited from a. owning municipal bonds. b. making real estate loans. c. making personal loans. d. owning common stock.

owning common stock.

Currency includes a. paper money and coins. b. paper money, coins, and checks. c. paper money and checks. d. paper money, coins, checks, and savings deposits.

paper money and coins.

Buying shares of UBER when they went public is an example of the a. primary market b. secondary market c. financial intermediation d. indirect finance

primary market

The 1980s is NOT known for banking a. innovation b. regulation c. consolidation d. all of the above e. none of the above

regulation

Which of the following is an example of financial intermediation? a. IBM issues a bond that is sold to a retired person b. saver makes a deposit in credit union, credit union makes loan to a member for a new car c. IBM issues common stock that is sold to a college student d. U.S. Treasury sells bonds to fund government spending

saver makes a deposit in credit union, credit union makes loan to a member for a new car

Buying a U.S. Treasury bond from your friend is an example of a. primary market b. indirect finance b. financial intermediation d. secondary market

secondary market

A well-functioning financial system:

solves asymmetric information problems

When I purchase ________, I own a portion of a firm and have the right to vote on issues important to the firm and to elect its directors. a. bonds b. notes c. bills d. stocks

stocks

An increase in EXPECTED PROFITABILITY OF INVESTMENT OPPORTUNITIES affects demand or supply? Shifts to the left or the right?

supply; right

An increase in GOVERNMENT DEFICITS affects demand or supply? Shifts to the left or the right?

supply; right

The Federal Reserve rescued the investment bank Bear Stearns because of

systemic risk

Open Market Operations refer to:

the buying and selling of government bonds by the Fed

Financial Innovation

the development of new financial products and services

What is the key advantage of fiat money

the government can control the supply through the central bank by printing what they want

Nominal Interest Rate

the interest rate actually paid for a loan -growth in money from waiting

Real Interest Rate

the interest rate corrected for the effects of inflation nominal interest rate - inflation rate

Inflation Rate

the percentage rate of change in price level over time

Monetary Base

the quantity of currency plus bank reserves

Why is financial regulation probably necessary

to avoid systemic risk and asymmetric information

What is the key advantage of commodity money (not a characteristic)

universally Accepted Not easy to abuse but also not easy to control supply

Financial Market

where buyers and sellers exchange financial assets