Money and Banking Part 3

James, John, and Kojo buy houses with funds from First All Bank. First All Bank puts all three loan agreements together, divides them into one hundred pieces of financial instruments, and sells them to several investors. The one hundred financial instruments can be accurately described as which of the following?

Mortgage-backed securities

Refer to Figure 3-2. A change from Point A to Point B represents a(n):

decrease in quantity demanded.

Refer to Figure 3-3. A change from Point A to Point E represents a(n):

decrease in supply.

The ___________ is the only price where quantity demanded is equal to quantity supplied.

equilibrium price

The ____________ is the quantity where quantity demanded and quantity supplied are equal at a certain price.

equilibrium quantity

If the price is below the equilibrium level, then the quantity demanded will exceed the quantity supplied. This is known as ___________________

excess demand

In a world where there is only direct financing, small savers would be subject to ______________, because their portfolios would not be sufficiently ______________.

high risks, diversified

Which of the following would reduce the supply of microcomputers?

higher wage rates for the workers that assemble the computers

Refer to 3-1. Using the graph above and beginning on D1, a shift to D2 would indicate a(n):

increase in demand.

Refer to Figure 3-3. A change from Point A to Point B represents a(n):

increase in quantity supplied.

Refer to Figure 3-3. A change from Point A to Point D represents a(n):

increase in supply.

The demand schedule for a good:

indicates the quantities that will be purchased at alternative market prices.

Underwriting is undertaken by ______________ when they ______________.

investment banks, guarantee security prices and buy them

Complete the following statement. Asymmetric information reduces financial transactions, because:

it makes it costly to borrow and lend.

Economists refer to the relationship that a higher price leads to a lower quantity demanded as the _____________.

law of demand

Financial intermediaries are the major means of moving funds from savers to borrowers, because they are able to provide financial services at ______________ by taking advantage of ______________.

lower cost; economies of scale

If a firm faces ________________________ , while the prices for the output the firm produces remain unchanged, a firm's profits will increase.

lower costs of production

Financial intermediaries are efficient at moving funds from savers to borrowers, because they ______________ by ______________.

lower risk; spreading it among many

A drought decreases the supply of agricultural products, which means that at any given price a lower quantity will be supplied; conversely, especially good weather would shift the __________________.

supply curve to the right

If new manufacturers enter the computer industry, then (ceteris paribus):

the supply curve shifts to the right.

A severe freeze has once again damaged the Florida orange crop. The impact on the market for orange juice will be a leftward shift of:

the supply curve.

But nearly all supply curves share a basic similarity: they slope _______________.

up from left to right

In economics, the demand for a good refers to the amount of the good that people:

will buy at various prices.

Which scenario best describes direct finance and not indirect finance?

ABC Corporation raises funds by selling commercial paper to DEF Finance Company.

Andy views beer and pizza as complements to one another. If the price of pizza decreases, economists would expect:

Andy's demand for beer to increase.

Why are bonds issued by municipalities to finance large projects attractive to investors?

Because the interest rates are exempt from federal income tax

Joan borrows $100.00 from her sister with the promise to repay at the end of the month. Her sister goes to the bank to withdraw $100.00 from her bank account to give it to her. This is an instance of which of the following?

Direct financing

What does an upward sloping yield curve imply?

Future short-term rates are expected to rise.

If an increase in the price of Good X causes a decrease in the demand for Good Y, we can conclude that:

Goods X and Y are complement goods.

Pam asks her mother for a loan. Her mother does not have it, so she borrows from her sister, and gives it to Pam. This transaction can be described as which of the following?

Indirect finance

I lend funds to Jake, who has a reputation of being trustworthy. He turns around and lends the funds to Jane, whom I do not know. Which of the following characterizes Jake's role?

Intermediary

Why is indirect finance more important than direct finance in the U.S. economy?

It moves more funds from savers to borrowers than direct finance.

If the risk associated with holding an asset increases and expected inflation also increases, then what will happen to the equilibrium interest rate?

It will increase.

When a business borrows directly from a saver, the business incurs which of the following?

Liability

First All Bank is a financial intermediary. This means that First All Bank does which of the following?

Takes deposits from depositors and lends them to borrowers

The interest rate is determined by which of the following?

The demand and supply of securities

The real interest rate is measured by which of the following?

The difference between the nominal interest rate and inflation

In direct finance, as opposed to indirect finance, the transaction is between what entities?

The lender and the borrower

What is the yield to maturity?

The rate at which the stream of cash flows from an instrument must be discounted to equal its value today

Erica borrows $1,000.00 from Jorge. Jorge demands repayment in a year in the amount of $1,100.00. What is the yield to maturity?

The same as the simple interest rate

Interpret the following statement: "An increase in the price of wheat will encourage farmers to increase the quantity of wheat supplied to the market."

The statement is correct.

Which of the following is a main reason for the dominance of financial intermediaries in the economy?

They are able to reduce transaction costs through economies of scale.

In Table 1 below, what will be the slope of the yield curve? TABLE 1 Expected interest rate on one-year bonds over the next five years is as follows: Year Interest Rate 1 2% 2 3% 3 4% 4 5% 5 6%

Upward Sloping

Under what condition will real interest rate in the economy be negative?

When inflation is greater than the nominal interest rate

A change in price of a good or service typically causes ___________________________ for that specific good or service.

a change along the supply curve

According to the law of supply:

there is a direct relationship between price and the quantity supplied.

When quantity demanded decreases in response to a change in price:

there is a movement up along the demand curve.

A firm accepts and keeps funds for several people with the promise that they can withdraw them anytime they want. The same firm then lends the funds to borrowers. Which of the following best identifies this type of firm?

A depository institution

You win a lottery which promises to pay you $1,000.00 over five years in equal installments. The interest rate is 5%. The amount you won is actually closest to what amount?

$865.00

Erica borrows $1,000.00 from Jorge. Jorge demands repayment in a year in the amount of $1,100.00. What is the yield to maturity?

10.00%

In Table 1 below, what will be the interest rate on a two-year bond? TABLE 1 Expected interest rate on one-year bonds over the next five years is as follows: Year Interest Rate 1 2% 2 3% 3 4% 4 5% 5 6%

2.5%

______________ are enacted when discontented sellers, feeling that prices are too low, appeal to legislators to keep prices from falling.

Price floors

Financial intermediaries succeed in lending and borrowing by doing which of the following?

Reducing moral hazard

When an individual takes out a loan from a bank to buy a car, the individual issues which of the following?

Security

How is risk premium defined?

The spread between the interest rates on default-free and default-risk bonds of the same maturity

After widespread press reports about the dangers of contracting "mad cow disease" by consuming beef from Canada, the likely economic effect on the U.S. demand curve for beef from Canada is:

a shift of the demand curve for beef to the left.

Any given demand or supply curve is based on the ceteris paribus assumption that ___________________.

all else is held equal

The term "ceteris paribus" means that:

all variables except those specified are constant.

The nature of demand indicates that as the price of a good increases:

buyers desire to purchase less of it.

When __________________ , a firm will supply a higher quantity at any given price for its output, and the supply curve will shift to the right.

costs of production fall

The demand curve for a typical good has a(n):

negative slope because some consumers switch to other goods as the price rises.

The downward slope of the demand curve again illustrates the pattern that as _________________ rises, _________________ decreases.

price, quantity demanded

A supply curve is a graphical illustration of the relationship between price, shown on the vertical axis, and ____________ , shown on the horizontal axis.

quantity

A demand curve shows the relationship between price and _________________ on a graph.

quantity demanded

_________________ refers to the total number of units that are purchased at that price.

quantity demanded

When economists talk about supply, they are referring to a relationship between price received for each unit sold and the _________________.

quantity supplied