Ch 1

Question 1

Financial Markets

Answer 1

markets in which funds are transferred form people who have an excess of available funds to people who have a shortage.

Question 2

Security

Answer 2

(Financial instrument) is a claim on the issuer’s future income or assets

Question 3

Assets

Answer 3

(any financial claim or piece of property that is subject to ownership)

Question 4

Bond

Answer 4

Is a debt security that promises to make periodic payments for a specified period of time.

Question 5

Interest rate

Answer 5

is the cost of borrowing or the price paid for the rental of funds.

Question 6

Common stock

Answer 6

represents a share of ownership in a corporation. Issuing and selling to the public is a way for corporations to raise funds to finance their activities.

Question 7

financial intermediaries

Answer 7

institutions that borrow funds from people who have saved and in turn make loans to other people.

• • Banks: accept deposits and make loans
• • other financial inst: insurance companies, finance companies, pension funds, mutual funds, and investment companies.

Question 8

Financial innovation:

Answer 8

the development of new financial products and services.

- can be an important force for good by making the financial system more efficient

Question 9

Financial crises:

Answer 9

Major disruptions in financial markets that are characterized by sharp declines in asset prices and the failures of many financial and nonfinancial firms.

Question 10

Why study money and monetary policy?

Answer 10

• Money plays important role in generating business cycles.
• recession (unemployment) and expansion affects everyone.
• Monetary theory ties changes in the money supply to changes in aggregate economic activity and price level.

Question 11

Money, Business Cycles, and Inflation

Answer 11

• The aggregate price level is the average price of goods and services in an economy
• A continual rise in the price level (inflation) affects all economic players
• Data shows a connection between the money supply and the price level

Question 12

Aggregate price level

Answer 12

The price level.

Question 13

Inflation

Answer 13

A CONTINUAL INCREASE IN THE PRICE LEVEL, AFFECTS INDIVIDUALS, business and government. Top priority on policymaking agendas.

Question 14

monetary policy

Answer 14

is the management of the money supply and interest rates.

- conducted in the US by the federal reserve system. (FED)

Question 15

Fiscal policy

Answer 15

Deals with government spending and taxation.

• Budget deficit is the excess of expenditures over revenues for a particular year.
• budget surplus is the excess of revenues over expenditures
• any deficit must be financed by borrowing.

Question 16

Foreign exchange market

Answer 16

Where funds are converted from one currency to another

Question 17

foreign exchange rate

Answer 17

is the price of one currency in terms of another.

- foreign exchange market determines rate.

Question 18

Aggregate output

Answer 18

the most commonly reported measure, the gross domestic product (GDP) is the market value of all final goods and services produced in a country during a year.

Question 19

Aggregate income

Answer 19

the total income of factors of production (land, labor and capital) from producing goods and services.

Question 20

real vs nominal magnitudes

Answer 20

when the total value of final goods and services is calculated using current prices, the resulting GDP measure is referred to as nominal GDP. Nominal = that values are measured using current prices.

Question 21

Aggregate price level

Answer 21

is a measure of average prices in the economy.

• 3 measures of the aggregate price level:
  1. GDP deflator
  2. PCE deflator
  3. The consumer price INDEX (CPI)