Econ330 Final
If you expect the inflation rate to be 15 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is
-8%
Order the dynamics of a financial crisis
1. credit and asset boom 2. banking crisis 3. debt deflation 4. price inflation
The US got its first National Currency around the
1860s
What does the fisher effect say?
An increase in expected inflation raises nominal interest rates
What factor apart from securitization was responsible for the Great Recession of 2007-2009?
An increase in funds lent to subprime borrowers
Describe the process of securitization
Bundle loans and split them into bonds backed by a pool of loans
What does the real interest rate measure?
How much you actually lost from borrowing or gained from saving
asymmetric information
Information between 2+ parties doesn't align (1 party knows more)
Which type of bond has the highest default risk?
Junk bonds
Currency + Bank Reserves + Checking Accounts
M1
The most comprehensive measure of aggregate output is
RGDP
systemic risk
The failure of one firm can bring down the system as a whole
Which of the following bonds would have the lowest default risk? a. Junk bonds b. investment-grade bonds c. US Treasury bonds d. Municipal bonds
US Treasury bonds
What is the global pool of money
all the savings in the world
The supply of _________ money can be controlled
fiat
Give an example of a contractual savings institution
insurance company, pension fund
Growth in money from waiting
nominal interest rate
Consumes less than their income
saver
What is the key advantage of commodity money
universally accepted
Which of the following can be described as involving indirect finance? a. You buy a US Treasury bill from the US Treasury at TreasuryDirect.gov b. You make a loan to your neighbor c. You deposit money into a checking account d. You purchase shares in an IPO by a corporation in the primary market
You deposit money into a checking account
Securitization
a process that converts a series of financial instruments into marketable securities
People, in general, do not lend money to one another to buy a house or a 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
The 1980s is known for banking a. innovation b. deregulation c. consolidation d. all of the above e. none of the above
all of the above
economies of scale
as quantity increases, cost decreases
The Federal Reserve was created after the crisis surrounding
banking panics of the early 1900s
In the bond market, the bond suppliers are the ________ and the bond demanders are the _________
borrower, saver
_____________ consume more than their income
borrowers
Monetary policy is conducted by the ___________ bank
central
controls the money supply
central bank
What does nominal interest rate measure?
change in cost (price) over time (from savers or borrowers)
________________ accepts deposits
commercial bank
accepts deposits
commercial bank
Universal acceptance is an advantage of ________ money
commodity
________________ has intrinsic value
commodity money
has intrinsic value
commodity money
Fisher effect
demand and supply both shift out, bond prices decrease, and interest rates increase
An increase in risk affects _______ and shifts it to the _______
demand; left
An increase in wealth affects _______ and shifts it to the _______
demand; right
an increase in liquidity affects ________ and shifts it to the ________
demand; right
A __________ is bought at a price below its face value, & the __________ value is repaid at the maturity date
discount bond, face
Financial intermediaries lower transaction costs by providing what 2 things?
economies of scale liquidity services
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
eurobonds
If an American opens a bank account at an Italian bank that is denominated in dollars, these accounts and their value are known as
eurodollars
The ___________ controls the supply of money in the US
federal reserve/central bank
development of new financial products and services
financial innovation
_____________ connects savers and borrowers
financial intermediary
___________ are where funds are exchanged
financial market
where funds are exchanged
financial market
Claim on issuers future income or assets
financial security
Federal government conducts ___________ policy
fiscal
government spending and taxes to affect the economy
fiscal policy
List the 2 categories of things that affect the supply of bonds besides price
government deficits expected profitability
The interest rate falls when either the demand for bonds _______ or the supply of bonds _______
increases; decreases
What is the biggest risk associated with fiat money
inflation (tempting for the government to print more to pay bills)
price of impatience
interest rate
borrowing and interest rates have an _________ relationship
inverse
Buying capital is called
investing
buyer of capital
investor
______________ is the relative ease and speed with which an asset can be converted into a medium of exchange
liquidity
Liquidity services:
make it easier for customers to conduct transactions
As a result of strict banking regulations, the US has:
many more smaller banks when compared to other industrialized countries
Kevin purchased concert tickets with a $100 bill is an example of the _________ function of money
medium of exchange
3 functions of money
medium of exchange unit of account store of value
The greatest period of financial regulation in the US occurred in the
mid 1900s
The _______________ deals in short-term debt instruments
money market
An example of __________________ is when a corporation uses the funds raised from selling bonds to fund corporate expansion to pay for for Caribbean cruises for all of its employees and their families
moral hazard
A yield to maturity for a discount bond is _________ related to the current bond price
negatively
real interest rate equation
nominal interest rate (YTM) - inflation rate
In order to reduce risk and increase the safety of financial institutions, commercial banks and other depository institutions are prohibited from
owning common stock
Currency includes
paper money and coins
Buying a 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 US government selling US Treasury Bonds is an example of
primary market
What role did the global pool of money play in the housing bubble?
pushed banks to lend to subprime borrowers
The possibility that interest rates could change and affect the value of your bond is known as
rate-of-return risk
List the 3 categories of things that affect the demand for bonds besides price
risk wealth liquidity
M2 includes ____________ when M1 does not
savings accounts
Buying a US treasury bond from your friend is an example of... a) primary market b) indirect finance c) financial intermediation d) secondary market
secondary market
When I purchase ___________, I own a portion of a firm and have a right to vote on issues important to the firm and elect its directors
stock
A claim on issuers future income or assets is a
stock/financial security
An increase in expected profitability of investment opportunities affects _______ and shifts it to the ________
supply; right
An increase in government deficits affects ______ and shifts it to the _______
supply; right
The federal reserve rescued Bear Sterns because of
systemic risk
Why are commercial banks not allowed to buy stock with your deposits
systemic risk
Which of the following can be described as involving indirect finance? a. you buy a US Treasury Bill from the US Treasury b. You make a loan to your neighbor c. You buy shares in a mutual fund d. You purchase shares
you buy shares in a mutual fund
Increasing the amount of information available to investors helps to reduce the problems of ________ and ________ in the financial markets
adverse selection; moral hazard
What is the solution to the key disadvantage of fiat money
an independent central bank
Why do bank runs occur
asymmetric information
Why is financial regulation probably necessary
asymmetric information and systemic risk
An insurance company is an example of what type of financial intermediary
contractual savings
____________ measures the price of impatience
interest rate
There is ________ for any bond whose time to maturity matches the holding period.
no interest-rate risk
cost in goods from borrowing
real interest rate
Buying shares of apple this year is an example of the
secondary market
A well functioning financial system
solves asymmetric information problems.
What is the key disadvantage to fiat money
tempting to pay bills by printing more
How did competitive forces lead to the repeal of the Glass-Steagall Act's separation of the banking and securities industries?
- The act's restrictions put American banks at a competitive advantage relative to foreign banks - Financial innovation motivated banks and other financial institutions to bypass the intent of the Glass-Steagall Act - The Fed allowed bank holding companies to enter the underwriting business
If you expect the inflation rate to be 2% next year, and a 1-year bond has a yield to maturity of 7%, then the real interest rate on this bond is
5%
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 saving and loan association
Who was the first Treasury Secretary of the US?
Alexander Hamilton
What is the key disadvantage of commodity money
Can't control supply