Exercise 2 Flashcards
Economic policy affects:
the entire financial system
More than half of all US dollars can be found
in foreign countries
The expected rate of change in prices is known as the
expected inflation rate
During the 2000s, banks became complacent about making mortgage loans because:
the banks counted on housing prices to keep appreciating
In the long run, the only economic variable that the Fed can affect is:
inflation
An equation that relates the interest rate to the output gap and the inflation rate is
the Taylor rule
Another name for a debt security is a:
bond
In the US, the biggest issuers of securities are:
business firms
The owner of a financial security is known as
a lender
Which of the following is true of debt securities?
A debt security specifies a particular maturity date
A company that takes short term deposits and makes long term loans is a
financial intermediary
Owning a variety of securities means engaging in
diversification
The market in which a security is sold from one personal investor to another is know as
the secondary market
US gov borrows by auctioning its bonds in the
primary market
If the demand for a company’s bonds decreases, supply remaining unchanged,
its interest rate will rise while its equilibrium quantity will fall
Risk that cannot be eliminated by diversification is referred to as
market risk
The ease or difficulty with which you can buy or sell a security in the secondary market when you want to without incurring significant costs is known as:
liquidity
A US gov savings bond is an example of a
nonmarketable security
Because these securities are more liquid and generally have smaller price fluctuations, corporations and banks use the _____ securities to earn interest on temporary surplus funds
money market
US Treasury bills pay no interest but are sold at a ____. That is, you will pay a lower price than the amount you receive at maturity.
Discount
A short term debt instrument issued by well-known corporations is called
commercial paper
The most liquid securities traded in the capital market are:
treasury bonds
Prices of money market instruments undergo the least price fluctuations because of
the short terms to maturity for the securities
Functions of money
Medium of exchange
unit of account
store of value
Ultimately the value and functionality of money are determined by the
general acceptability to other people
All the financial assets in M1 can be spent
True
Hyperinflation:
tends to destroy ALL functions of money
A $2 bill is an example of:
fiat money
Which of the following does not belong in the M1 category?
savings deposits
The conversion of a barter economy to one that uses money
increases efficiency by reducing transactions costs
What is required of a good medium of exchange?
Low uncertainty over value in trade
When money prices are used to help us maximize our utility choices, money is said to function as a
unit of account
In explaining the evolution of money
new forms of money evolve to lower transactions costs
People hold money even during inflationary episodes when other assets prove to be better stores of value. This can be explained by the fact that money is
extremely liquid
Legal tender:
having legal tender is neither necessary nor sufficient to be money
I an individual goes to a bank and deposits $15,000 cash they just received from an illegal drug deal into their savings account, then
M1 decreases and M2 stays the same
