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