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
