Chapter 6 - Financial Markets 2

Question 1

nominal interest rate

Answer 1

nominal interest rate is the interest rate in terms of dollars

Question 2

real interest rate

Answer 2

real interest rate is the interest rate in terms of a basket of goods

Question 3

real interest rate (i-expected inflation)

Answer 3

ex-ante real interest rate

Question 4

realized real interest rate (i-inflation)

Answer 4

ex-post interest rate

Question 5

Balance sheet: Liabilities

Answer 5

checkable or demand deposits (but also money owed to other banks and bondholders)

Question 6

Balance sheet: Assets

Answer 6

mainly loans and reserves

Question 7

Capital

Answer 7

Assets-liabilities

Question 8

fire sale prices

Answer 8

prices far below the true value

Question 9

Why were banks highly leveraged?

Answer 9

Banks were highly leveraged because:

a) underestimated the risk
b) managers had incentives to go for high expected returns without fully taking into account the risk of bankruptcy
c) banks avoided financial regulations