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