CHP 9 Qs

Accurately describe the role of securitization in contributing to the financial crisis of 2007-2008

Banks bundled mortgages together and then sold them on the market as a financial asset. However, the risk level of these securitized assets was often much higher than the purchaser thought

Decide whether each of the scenarios related to the loanable funds market will result in shift in supply or demand: "Due to an increase in revenues after a tax hike, the US is able to eliminate the deficit and begins to maintain a balanced budget for the first time in several decades"

Shift in demand

Decide whether each of the scenarios related to the loanable funds market will result in shift in supply or demand "China decides to reduce its capital investment in the US, as it expects low returns due to a weak US economy"

Shift in supply

Decide whether each of the scenarios related to the loanable funds market will result in shift in supply or demand: "As a result of a stock market boom, individuals begin to feel richer and spend more while also saving less"

Shift in supply

Which of these would tend to increase the amount of savings supplied?

The interest rate rises.

What is Financial intermediary?

a financial institution that transforms investor funds into financial assets

Islamic banking system is based on the principle of partnership. In Islamic banking, the shareholders, the depositors and the borrowers-all would participate on a profit-loss sharing basis. Whereas the relation of customer and conventional bank is of:

creditor and debtor

Bond prices and _____ move in opposite directions

interest rates

The "shadow banking system" is primarily composed of:

investment banks

As interest rate decreases, what happens to the quantity of loanable funds demanaded?

quantity demanded will increase

What effect will an increase in interest rates have on the quantity of loanable funds supplied?

quantity supplied with increase

Islamic banking structure is based on_____

risk sharing

Trading in the market for loanable funds occur between _____, and this trading determines the equilibrium_______

savers and borrowers; interest rate

If the projected rate of return for a project is less than the interest rate for a loan that is necessary to complete the project, how will the borrowing business act?

the business will not take out the loan

the interest rate represents _______

the price of a loans

Most (if not all) of the practices and financial instruments such as mortgaged-backed securities (MBS), collateralized debt obligation (CDO) and credit default swaps (CDSs), which are believed to be responsible for the crisis, are not permitted under Islamic banking principles. TRUE or FALSE?

true

Decrease the interest rate:

-Increase in savings -Decrease in investor optimism

Increases the interest rate:

-Investment in tax credit -Increase in rate investments

Suppose that the government is concerned with the unemployment rate and, as a response, offers a tax credit to any firm that builds a new factory in the United States. Show the effect of this policy on the market for loanable funds by shifting the appropriate curve in the graph.

-Shift the demand curve to the right -Supply curve stays where it is

what is Crowding out

-reduction in consumption and investment spending that results from government borrowing -increases in interest rates

An example of crowding-out effect on investment as it pertains to macroeconomics

Jank wants to borrow money to create a cowboy-themed inflatable bounce house for kids called "Wild Wide West" However, the government is running a deficit which has increased interest rates so much that JAck can no longer afford to borrow the money

the source of the supply for loanable funds is _____

Savings

Decide whether each of the scenarios related to the loanable funds market will result in shift in supply or demand "Calopolis, a college town in Northern california, has for many years banned the presence of fast food restaurants in city limits. As of 2012, however, the city will allow several fast food companies to open franchised locations"

Shift in demand