Ch 9. The Financial System, Money, & Prices

Question 1

Financial intermediaries

Answer 1

Firms that extend credit to borrowers using funds raised from saver

Question 2

Bond

Answer 2

A legal promise to repay debt, usually including both the principal amount and regular interest payments

Question 3

Principal amount

Answer 3

the amount originally lent

Question 4

Maturation date

Answer 4

the date the principal amount will be paid

Question 5

Coupon payments

Answer 5

Regular interest payments made to the bond holder

Question 6

Coupon rate

Answer 6

the interest rate promised when a band is issued; the annual coupon payments are equal to the coupon rate times the principal amount to the bond

Question 7

Stock (equity)

Answer 7

a claim to partial ownership of a firm

Question 8

Dividend

Answer 8

A regular payment received by stock holders for each share they own

Question 9

Risk premium

Answer 9

the rate of return that financial investors require to hold risky assets minus the rate of return on safe assets

Question 10

Diversification

Answer 10

the practice of spreading one’s wealth over a variety of different financial investments to reduce overall risk

Question 11

Mutual fund

Answer 11

A financial intermediary that sells shares in itself to the public, then uses the funds raised to buy a wide variety of financial assets

Question 12

Money

Answer 12

An asset that can be used in making purchases

Question 13

Medium of exchange

Answer 13

An asset used in purchasing goods and services

Question 14

barter

Answer 14

the direct trade of goods or services for others

Question 15

Unit of account

Answer 15

a basic measure of economics value

Question 16

Store of value

Answer 16

an asset that serves as a means of holding wealth

Question 17

M1

Answer 17

Sum of currency outstanding and balances held in checking accounts

Question 18

M2

Answer 18

All the assets in M1 plus some additional assets that are usable in making payments but greater cost or inconvenience than currency or checks

Question 19

Bank reserves

Answer 19

Cash or similar assets held by commercial banks for the purpose of meeting depositor withdrawals and payments

Question 20

100% banking reserves

Answer 20

a situation in which banks’ reserves equal 100% of their deposits

Question 21

Reserve deposit ratio

Answer 21

Bank reserves divided by deposits

Question 22

Fractional-reserve banking system

Answer 22

A banking system in which bank reserves are less than deposits so that the reserve-deposit ratio is less than 100%

Question 23

Federal Reserve System (Fed)

Answer 23

The central bank of the U.S.

Question 24

Open-market purchase

Answer 24

The purchase of government bonds from the public by the Fed for the purpose of increasing the supply of bank reserves and the money supply

Question 25

Open-market sale

Answer 25

The sale by the Fed of government bonds to the public for the purpose of reducing bank reserves and the money supply

Question 26

Open-market operations

Answer 26

Open-market purchases and open-market sales

Question 27

Velocity

Answer 27

A measure of the speed at which money changes hands in transactions involving final goods and services, or GDP divided by the stock of money.

Question 28

EQ: Velocity

Answer 28

V = (P x Y)/M …where P x Y = nominal GDP and M = money supply

Question 29

Quantity equation

Answer 29

Money times velocity equals nominal GDP.

Question 30

EQ: Quantity

Answer 30

M x V = P x Y