Definitions

Question 1

What is GDP?

Answer 1

Gross Domestic Product - the total monetary value of all the finished goods and services produced within a country’s borders in a specific time period

Question 2

What is GDP per capita?

Answer 2

The GDP averaged out over the population of a country

Question 3

What is federal reserve?

Answer 3

The US central bank

Question 4

What are ‘subprime’ mortgages?

Answer 4

Mortgages lent to people who are seen as a bad credit risk because they have irregular work/low wages or have been in debt before.

Question 5

What is Fannie Mae/Freddie Mac?

Answer 5

US ‘government backed’ mortgage lenders

Question 6

What is Dow Jones?

Answer 6

Stock market index of US shares - the average of how high the shares are in the market

Question 7

What is interbank lending market?

Answer 7

A market where banks lend to other banks

Question 8

What is Libor?

Answer 8

London InterBank Offered Rate - the interest rate charged on the interbank lending market.

Question 9

What is Mortgaged Backed Securities?

Answer 9

Financial assets deriving their value from mortgages. These can be bought and sold on financial markets.

Question 10

What is Auction Rate Securities?

Answer 10

Financial assets where large institutions raise funds by selling these bonds. Anyone who wishes to withdraw their investments can exit via regular auctions

Question 11

What is paradox of thrift?

Answer 11

When everyone increases their savings then total expenditure is reduced and so this causes an issue reducing output and causing unemployment.

Question 12

What does the term ‘baby-sitting’ mean?

Answer 12

Baby-sitting is an analogy to describe paradox of thrift.

Question 13

What are bubbles?

Answer 13

Bubbles in economics are defined as high volumes of trade at unsustainably high prices.
Unsustainable as these prices are far removed from the intrinsic value of the good

Question 14

What is Moral Hazard?

Answer 14

Agents may use money in ways that go outside what the bank (the principal) wants even though it is using the bank’s money.

Question 15

What is the aggregate demand equation?

Answer 15

AG = C + I + G + (X-Z)

Question 16

What happens to aggregate demand if consumption and investment go down?

Answer 16

If everything else stays the same then aggregate demand will also go down

Question 17

What must aggregate demand be the same as?

Answer 17

GDP, as aggregate demand is the total amount of spending in the economy as is GDP

Question 18

What is a liquidity trap?

Answer 18

The situation where zero interest rate does not raise an economy out of a recession

Question 19

What are exchange rates?

Answer 19

Generally currencies on the foreign exchange market are, like other markets, exchanged at a given price.

Question 20

What occurred due to globalisation?

Answer 20

Globalisation resulted in countries being dependent on one another’s economies in order to continue to grow and improve. However if one country’s economy were doing badly this would negatively impact any country invested in the country through globalisation

Question 21

What are bank runs?

Answer 21

Bubbles often bring on bank runs.
Bank runs are the result of large numbers of a bank’s customers turning up at once to claim their money.
Usually caused by rumours that a bank is in financial difficulty.

Question 22

What is The International Monetary Fund?

Answer 22

The International Monetary Fund is the international organisation that aims to secure short-term economic stability. It has a variety of roles but its main role was to overcome perceived failures in capital markets by providing loans to governments.

Question 23

What are gilts?

Answer 23

Gilts are bonds issued by the government (especially the UK government). They constitute the main form of borrowing by the government with the sale price of the gilts going to the UK Treasury.

Question 24

Why are guilts issued? (2 main reasons)

Answer 24

To overcome a shortage of cash because of irregularities of the flow of taxation
To cover a gov budget deficit (taxes

Question 25

What are collateralised debt obligations? (CDO)

Answer 25

A CDO is a promise to pay income from a pool of financial or other assets. Investors in CDOs are graded according to the level of risk they are willing to undertake.

Question 26

What do each of the levels in a CDO mean?

Answer 26

Investors willing to take on the least risk and pay higher rates are in the top/senior level.
Those willing to take on the most risk go into lower/junior levels.

Question 27

Which level in the COD gets to claim income first?

Answer 27

The senior level get first shout and so that is why junior is risky - could result in no income

Question 28

What are credit rating agencies?

Answer 28

Rating agencies are institutions that assign credit ratings for issuers of financial assets as well as for the financial assets themselves.

Question 29

What do credit rating agencies allow companies to do?

Answer 29

They allow companies to give a ‘quality guarantee’ on any asset they buy, they will receive an income.

Question 30

What is a credit crunch?

Answer 30

A considerable reduction of lending in the economy

Question 31

What is Quantitive easing?

Answer 31

The creation of money by the central bank - in the hope to overcome a credit crunch and/or recession