Econ ch 1-6 HW Flashcards
Financial markets promote greater economic efficiency by channeling funds from ________ to ________.
savers to borrowers
Prior to almost all recessions since 1950, there has been a drop in
the growth rate of money stock
There is a ________ association between inflation and the growth rate of money ________.
positive; supply
The management of money and interest rates is called ________ policy and is conducted by a nation’s ________ bank
monetary; central
A budget ________ occurs when government expenditures exceed tax revenues for a particular time period.
deficit
What is the typical relationship among interest rates on three-month Treasury bills, long-term Treasury bonds, and Baa corporate bonds?
They tend to move together over time with the corporate bond having the highest rate of interest
How does the size of the U.S. budget deficit in 2010 compare to the time period since1950?
expanded since 2007, in 2010 the deficit to GDP was 10%, average since 1950 was about 2%
Well-functioning financial markets allow the economy to
operate more efficiently
The principal lender-savers are
households
Securities are ________ for the person who buys them, but are ________ for the individual or firm that issues them.
assets; liabilities
If the maturity of a debt instrument is less than one year, the debt is called
short term
A financial market in which previously issued securities can be resold is called a ________ market.
secondary
A financial market in which only short-term debt instruments are traded is called the
money market
Federal funds
loans made by banks to each other on an overnight basis
banks with excess reserves can lend to banks with demand for extra money and charge FFR
If bad credit risks are the ones who most actively seek loans and, therefore, receive them from financial intermediaries, then financial intermediaries face the problem of
adverse selection
Financial institutions that accept deposits and make loans are called
depository institutions
Example of a depository institution
mutual savings bank
A person’s house is part of her
wealth
Currency includes
paper money and coins
Income
flow of earnings per unit of time
When compared to exchange systems that rely on money, disadvantages of the barter system include
the requirement of a double coincidence of wants
requirements for medium of exchange
widely accepted, not deteriorate quickly, easy to carry, divisible, easily standardized
___________ could be used for some other purpose other than as a medium of exchange, for example, gold coins could be melted down and turned into gold jewelry
commodity money
Included in M1
Currency
Traveler’s checks
Demand Deposits
Other check deposits
Included in M2
Small den. deposits
Savings and Money Markets
Money Mkt Mutual Fund shares
If an individual moves money from a small-denomination time deposit to a demand deposit account
M1 increases and M2 stays the same.
Most frequent forms of fixed payment loans
installment loans and mortgages
rate of return
sum of current yield and rate of capital gain
How does an equal increase in all bond interest rates change the prices of long term vs short term bonds
decreases long term bond returns more than short term
Prices and returns for ________ bonds are more volatile than those for ________ bonds, everything else held constant.
long term; short term
When the ________ interest rate is low, there are greater incentives to ________ and fewer incentives to ________.
real; borrow; lend
An increase in an asset’s expected return relative to that of an alternative asset, holding everything else constant, ________ the quantity demanded of the asset.
increases
Holding everything else constant, if interest rates are expected to increase, the demand for bonds ________ and the demand curve shifts ________.
decreases; left
If housing prices are expected to increase, then, other things equal, the demand for houses will ________ and that of Treasury bills will ________.
increase; decrease
If fluctuations in interest rates become smaller, then, other things equal, the demand for stocks ________ and the demand for long-term bonds ________.
increases; increases
or
decreases; decreases
When the interest rate on a bond is above the equilibrium interest rate, in the bond market there is excess ________ and the interest rate will ________
demand; fall
When the price of a bond decreases, all else equal, the bond demand curve
does not shift
Higher government deficits ________ the supply of bonds and shift the supply curve to the ________, everything else held constant.
increase; right
Deflation causes the demand for bonds to ________, the supply of bonds to ________, and bond prices to ________, everything else held constant
increase; decrease; increase
In Keynes’s liquidity preference framework, if there is excess demand for money, there is
an excess supply for bonds
How does an increase to the interest rates change the demand for money
decreases the quantity of money demanded
When the Fed ________ the money stock, the money supply curve shifts to the ________ and the interest rate ________, everything else held constant.
increases; right; falls
Factors that shift demand for money
Income effect, price level effect, expected inflation effect
When the growth rate of the money supply is increased, interest rates will fall immediately if the liquidity effect is ________ than the other money supply effects and there is ________ adjustment of expected inflation.
larger, slow
A bond with default risk will always have a ________ risk premium and an increase in its default risk will ________ the risk premium
positive, increase
A decrease in the liquidity of corporate bonds, other things being equal, shifts the demand curve for corporate bonds to the ________ and the demand curve for Treasury bonds shifts to the ________.
left; right
According to the expectations theory of the term structure, the interest rate on a long-term bond will equal the ________ of the short-term interest rates that people expect to occur over the life of the long-term bond.
average
According to the liquidity premium theory of the term structure, a downward sloping yield curve indicates that short-term interest rates are expected to
decline sharply in futur
An increase in the riskiness of corporate bonds will ________ the price of corporate bonds and ________ the price of Treasury bonds, everything else held constant.
reduce; increase
Bonds with no default risk are called
default-free bonds
how will the abolishment of income tax change the demand for municipal bonds?
decrease demand, higher interest rates
The U-shaped yield curve in the figure above indicates that short-term interest rates are expected to
fall moderately in the near-term and rise later on
The typical shape for a yield curve
gently upward sloping
A key assumption in the segmented markets theory is that bonds of different maturities
are not substitutes at all
