Ch 1 Questions Flashcards
What is the typical relationship between interest rates on 6-month Treasury bills, 10-year Treasury notes, and Baa corporate bonds?
A.
They tend to move together over time with the corporate bond having the highest rate of interest
All interest rates tend to move together over time with similar increases or decreases affected by the rate of inflation, economic growth, and events in financial markets. Corporate rates tend to be higher than Treasury rates due to considerations of risk. Longer-term rates tend to be higher than short-term rates due to the economic uncertainty that exists with longer time horizons.
What effect might a fall in stock prices have on business investment?
A fall in stock prices might cause businesses to
decrease investment.
What effect might a rise in stock prices have on consumers’ decisions to spend?
A rise in stock prices will generally lead to
more consumer spending.
As the price of stocks held by consumers increases:
or
As the interest paid on bonds held by consumers increases:
Consumers wealth and spending both increase.
When interest rates decrease, how might businesses and consumers change their economic behavior?
There will be more consumption spending on interest-sensitive items and more investment by businesses.
Consumption expenditure, or different forms of spending, will increase as interest rates decline. This is true for interest-sensitive purchases that might require increased borrowing at lower interest rates but also may lead to less saving activity.
Who benefits and who is hurt when interest rates rise?
Corporations with immediate capital construction needs are
worse off
Who benefits and who is hurt when interest rates rise?
Households with little debt, saving a significant fraction of annual income for retirement, are
better off
Who benefits and who is hurt when interest rates rise?
The federal government running persistent budget deficits is
worse off
Who benefits and who is hurt when interest rates rise?
Black-market entrepreneurs operating on a ‘cash-only’ basis are
worse off
How does a fall in the value of the pound sterling affect British consumers?
Foreign goods are now relatively more expensive; British consumers are hurt
A weaker currency makes foreign goods (US) more expensive to domestic (British) consumers. With the price of domestic goods unchanged, these imports are now relatively more expensive and British exports are relatively cheaper to foreign consumers.
A fall in the value of the pound will cause American businesses to be
WORSE OFF
When the dollar is worth less in relation to currencies of other countries, are you more likely to buy American-made or foreign-made electronics?
You are more likely to purchase
American-made products
Are US companies that manufacture semi-conductors happier when the dollar is strong or when it is weak?
Semi-conductor manufacturers are happier when the dollar is weaker
A stronger currency makes domestically-produced exports more expensive to foreign consumers. With the price of domestic goods unchanged, US imports are now relatively cheaper and American consumers will buy more imports and fewer goods produced in the United States.
What about an American company that is in the business of importing electronic consumer goods into the United States?
Importers of electronic goods into the United States are happier when the dollar is
stronger
Why are financial markets important to the health of the economy?
They channel funds from savers to investors
What is the basic activity of banks?
To facilitate the transfer of money from savers to borrowers
Which of the following is not an important financial intermediary in the economy?
The Fed. / the central bank
Financial intermediaries are institutions that borrow funds from people who have saved and in turn make loans to others.
What was the main cause of the recession that began in 2007?
Defaults in subprime residential mortgages.
In late 2007, U.S. financial institutions suffered losses, producing not only numerous bank failures but also the demise of two of the largest investment banks in the United States.
If history repeats itself and we see a decline in the rate of money growth as shown between 1980 and 1993, what might you expect to happen to
Real output: Uncertain . The inflation rate: Decline . interest rates: uncertain
Why do managers of financial institutions care so much about the activities of the Federal Reserve System?
Because the Federal Reserve affects interest rates, inflation, and business cycles, all of which have an important impact on the profitability of financial institutions.
When there is an increase in the value of the British pound sterling, all else equal:
When a foreign currency gains value, American goods are relatively cheaper than goods from that nation. Demand will increase for American goods as a result.
How can changes in foreign exchange rates affect the profitability of financial institutions? (Check all that apply.)
Changes in foreign exchange rates change the value of assets held by financial institutions and thus lead to gains and losses on these assets. Also, changes in foreign exchange rates affect the profits made by traders in foreign exchange who work for financial institutions.
Much of the U.S. government debt is held as Treasury bonds and bills by foreign investors. How do fluctuations in the dollar exchange rate affect the value of that debt held by foreigners?
Changes in dollar exchange rates do not cause changes in interest rates on T-bonds. But, as the dollar becomes stronger relative to a foreign currency, one dollar is equivalent to more foreign currency. Thus, for a given face value of bond holdings, a stronger dollar will yield more home currency to foreigners, so the asset will be worth more to foreign investors. Likewise, a weak dollar will lead to foreign bond holdings worth less to foreigners.
is a security that is a claim on the earnings and assets of a company
Issuing stock and selling it to the public is a way for corporations to raise funds to finance their activities.
Stock prices, as measured by the Dow Jones Industrial Average, have:
extremely volatile
When a firm issues stock, it has:
taken on additional partners that own part of the assets of the firm and share in the firm’s earnings.
When a company’s profits have been declining, the company is able to sell
less
stock at a higher price.
The value of stocks depends on the profits of the corporation that issued the original stocks. Therefore, when profits are declining, the value of the stock also decreases.
Which of the following is an example of financial intermediation?
A saver makes a deposit in a credit union, and the credit union makes a loan to a member for a new car.
The term bank generally includes all of the following institutions except:
finance companies
