Chapter 20

Question 1

Financial System

Answer 1

The institutions in the economy that facilitate the flow of funds between savers and investors

Question 2

Financial Markets

Answer 2

Households can directly provide resources for investment

Question 3

Bonds

Answer 3

Represents a loan from the bondholder to the firm

Question 4

Stocks

Answer 4

Represents an ownership claim by the shareholder in the firm

Question 5

Debt Finance

Answer 5

Raising investment funds by issuing bonds

Question 6

Equity Finance

Answer 6

Raising funds by issuing stock

Question 7

Financial Intermediaries

Answer 7

Households can indirectly provide resources for investment

Question 8

Risk Averse

Answer 8

Disinclined or reluctant to take risks

Question 9

Diversification

Answer 9

Reducing risk by holding many imperfectly correlated assets

Question 10

Mutual Funds

Answer 10

Financial intermediaries that sell shares to savers and use their funds to buy diversified pools of assets

Question 11

Asymmetric Information

Answer 11

A situation in which one party to an economic transaction has more information about the transaction than the other

Question 12

Adverse Selection

Answer 12

The tendency of people with more information to sort themselves in a way that disadvantages people with less information

Question 13

Moral Hazard

Answer 13

The risk that an imperfectly monitored agent will act in a dishonest or otherwise inappropriate way

Question 14

Financial Crisis

Answer 14

A major disruption in the financial system that impedes the economy’s ability to intermediate between those who want to save and those who want to borrow and invest

Question 15

Speculative Bubble

Answer 15

A spike in asset values within a particular industry. Usually caused by exaggerated expectations of future growth

Question 16

Leverage

Answer 16

The use of borrowed funds for the purposes of investment

Question 17

Fire Sale

Answer 17

As banks sell off some of their assets, buyers of risky assets are hard to find in the midst of a crisis, so the assets prices can sometimes fall

Question 18

Liquidity Crisis

Answer 18

A situation in which a solvent bank has insufficient funds to satisfy its depositors withdrawals

Question 19

Lenders of Last Resort

Answer 19

When a central bank lends to a bank in the midst of a liquidity crisis

Question 20

Shadow Banks

Answer 20

A diverse set of financial institutions that perform some functions similar to those of banks but do outside the regulatory system that applies to traditional banking

Question 21

Microprudential

Answer 21

Its goal has been to reduce the risk of distress in individual financial institutions

Question 22

Macroprudential

Answer 22

Its goal is to reduce the risk of system wide distress, thereby protecting the overall economy against declines in production and employment