Econ 330 Actual Study Guide

List 2 examples of financial regulation

Deposit Insurance and Prohibit insider trading

____, in accounting, is a system of bookkeeping so named because every entry to an account requires a corresponding and opposite entry to a different account.

Double entry. The double entry has two equal and corresponding sides known as debit and credit. Some sources suggest that Giovanni di Bicci de' Medici introduced this method for the Medici bank in the 14th century.

Financial markets have the basic function of

getting people with funds to lend together with people who want to borrow funds.

The principal leader-savers are

households

Why is regulation probably necessary?

Systematic risks Asymetric information

List 2 notable Financial instruments Money Market

T-bill Certificate of Deposit

What is/are problems with fiat money?

Temptation to print too much

Which of the following is a true statement?

The average price of goods and services in an economy is called the aggregate price level.

Which market is bigger?

The debt market is approximately 5 trillion. The equity market is 2 trillion

Which of the following statements about the characteristics of debt and equity is false?

They can both be short-term financial instruments.

Equity instruments are traded in the ________ market.

capital

Financial Intermediary:

connect savers with borrowers or sellers of assets with borrowers or savers

It is true that inflation is a

continually rising price level

The components of the US M1 money supply are demand and checkable deposits plus

currency plus travelers checks

Financial crises are major disruptions in financial markets that are characterized by sharp ____ in asset prices and the failures of many financial and non financial firms.

decline

There is a ________ association between inflation and the growth rate of money ________.

positive, supply

Calculate the approximate inflation rate if price for apple changes from $1.5 per pound to $1.65/lb.

((1.65-1.5)/1.5) * 100% =

Inflation =

((New-Old)/Old) * 100%

Rank the following assets from most from most liquid to least liquid 1) truck 2) Cash in the drawer 3) T-bill 4) A share of Apple Stock

2, 3, 4, 1

If there are five goods in a barter economy, one needs to know ten prices in order to exchange one good for another. If, however, there are ten goods in a barter economy, then one needs to know ________ prices in order to exchange one good for another. A) 20 B) 25 C) 30 D) 45

45 (x(x-1))/2

Typically borrowers have superior information relative to lenders about the potential returns and risks associated with an investment project. The difference in information is called ____.

Asymmetric Information

Give 3 examples of financial intermediaries:

Bank, Mutual Fund Company, Insurance Company, Investment Bank

Why can financial intermediaries lower transaction cost?

Because of economies of scale

List 2 types of securities:

Bond and Stock

List 2 notable Financial instruments capital market.

Bond and Stocks

When I purchase a corporate ________, I am lending the corporation funds for a specific time. When I purchase a corporation's ________, I become an owner in the corporation.

Bond, stock

Why is inflation important for borrowers and lenders?

Borrowers get more for their money which affects buying power

____ is the excess of Government's expenditures over revenues for a particular year

Budget Deficit

____ is the excess of Government's revenues over expenditures for a particular year

Budget Surplus

____ is the institution in charge of monetary policy

Central Bank (Fed bank)

____ money could be used for some other purpose other than as a medium of exchange, for example, gold coins could be melted down and turned into gold jewelry.

Commodity

How is a Stock different from a bond?

Common stock represents a share of ownership in a corporation A bond is a debt security that promises to make payments periodically for a specified period of time

Saver is someone who ____ less than their income while investor is the one who buys ____

Consumes, Capital

Interest rate is ____ to borrower or ____ too lender.

Cost, Reward

What is/are advantages of fiat money?

Easy to control supply

If Microsoft sells a bond in London and it is denominated in dollars, the bond is a

Eurobond

The agency that was created to protect depositors after the banking failures of 1930-1933 is the A) Federal Reserve System. B) Federal Deposit Insurance Corporation. C) Treasury Department. D) Office of the Comptroller of the Currency.

Federal Deposit Insurance Corporation

____ is the development of new financial products and services, in particular, the advent of the information age and e-finance. Can be an important force for good by making the financial system ____ efficient.

Financial Innovation, more

Channeling funds from individuals with surplus funds to those desiring funds when the saver does not purchase the borrower's security is known as:

Financial intermediation

What does fiscal policy control?

Government spending Taxes

The interest rate on Baa ( medium quality) corporate bonds is ____, on average, than other interest rates, and the spread between it and other rates became ____ in the 1970's.

Higher, larger

When inflation exceeded 1,000% per month, one can conclude that the economy suffered from

Hyper Inflation

____ is a period of extreme inflation generally greater than 50% per month.

Hyper Inflation

Which of the following is not a secondary market?

IPO market

What is Inflation?

Increase in price level

What are regulators' responsibility?

Increase/Standardize info Insure soundness of financial institution

____ is an agreement in which the buyer's bank guarantees to pay the seller's bank at the time goods/services are delivered.

Letter of credit

Capital markets - deal in ____ debt and equity instruments

Long term

List 2 advantages of Financial Intermediaries

Lower transaction cost Economies of scale

____ is the narrowest monetary aggregate that the fed reports.

M1

Which of the following statements about financial markets and securities is true?

Many common stocks are traded over-the-counter, although the largest corporations usually have their shares traded at organized stock exchanges such as the New York Stock Exchange.

The management of money and interest rates is called ____ policy and is conducted by a nation's ____ bank

Monetary, Central

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.

Moral hazard

List 2 types of asymmetric information problems?

Moral hazard Adverse Selection

What are some typical interest rate levels for different bonds or loans

Mortgage (30 year): 3-6% Car: 4-6% Corporate Bond 4-6% US Treasury Bond 0-4%

Financial Institutions that channel money from many small savers to large borrowers are called ____?

Mutual Funds

____ are financial intermediaries that acquire funds by selling shares to many individuals and using the proceeds to purchase diversified portfolios of stock and bonds.

Mutual Funds

Why does there need to be a reward or cost?

Price of impatience

What are advantages of commodity money?

Products traded as money (can't abuse think of cigarettes)

What is the difference between real interest rate and nominal interest rates?

Real interest rate is the change in what I can BUY/Consume by waiting. Nominal Interest rate is the change in MONEY I have by waiting.

List 3 things that affect interest rates:

Risk, Inflation, and Duration (time to pay back)

Money markets - deal in ____ debt instruments

Short term

Who is the current US Treasury Secretary?

Steven Mnuchin

What causes inflation?

To much money

The most liquid securities traded in the capital market are

US Treasury Bonds

An investment bank purchases securities from a corporation at a predetermined price and then resells them in the market. This process is called _____.

Underwriting

Which of the following can be described as involving indirect finance?

You buy shares in a mutual fund

A financial crisis is

a major disruption in the financial markets

Which of the following is false?

a recession always follows a decrease in the growth rate of money supply

If bad credit risks are the ones who most actively seek loans then financial intermediaries face the problem of

adverse selection

A common stock is a claim on a corporation's

earnings and assets

E-finance is the ability to deliver financial services ____

electronically

When secondary market buyers and sellers of securities meet in one central location to conduct trades the market is called a(n) A) exchange. B) over-the-counter market. C) common market. D) barter market.

exchange

Paper currency that has been declared legal tender but is not convertible into coins or precious metals is called ________ money.

fiat

Everything else constant, a decrease in the value of the dollar relative to all foreign currencies means that the price of foreign goods purchased by Americans

increases

The price paid for the rental of borrowed funds (usually expressed as a percentage of the rental of $100 per year) is commonly referred to as the

interest rate

Monetary aggregates are

measures of the money supply reported by the Federal Reserve.

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

List 3 functions of money

medium of exchange, unit of account, store of value

What does monetary policy control?

money supply interest rate price

The foreign exchange market is where funds are converted from ____ into another

one currency

In a(n) ____ market, dealers in different locations buy and sell securities to anyone who comes to them and is willing to accept their prices.

over-the-counter

Currency includes

paper money and coins

The currency component includes ____ and ____ held in the hands of the nonbank public.

paper money, coins

The primary purpose of deposit insurance is to

prevent banking panics

A corporation acquires new funds only when its securities are sold in the

primary market by an investment bank

Well-functioning financial markets

produce an efficient allocation of capital

The foreign exchange ____ is the price of one currency in terms of another currency

rate

Financial Systems channel funds from ____ too ____.

saver, borrower

A financial market in which previously issued securities can be resold is called a _____ market.

secondary market

From 1950 - 2011 the price level in the United States increased more than

sixfold

____ is not included in the M1 measure of money but is included in the M2 measure of money?

small-denomination time deposits

Money is defined as

something used to trade for goods and services or to repay debt.

Prior to almost all recessions since 1900, there has been a drop in

the growth rate of the money stock

Monetary policy us the management of

the money supply and interest rate

Money can be used for the purpose of comparison of the relative value of different goods and services. This describes ___ function of money.

unit of account

Everything else constant, a stronger dollar will mean that

vacationing in England becomes less expensive

Which of the following can be described as direct finance?

you borrow $2500 from a friend