final

Question 1

money market

Answer 1

trade in short-term debt. constant flow of cash between governments, corporations, banks, and financial institutions. Borrowing and trading for a period of overnight to no more then a year

Question 2

capital market

Answer 2

encompasses stocks and bonds

Question 3

financial intermediaries

Answer 3

Banks.
Mutual savings banks.
Savings banks.
Building societies.
Credit unions.
Financial advisers or brokers.
Insurance companies.

Question 4

functions of money

Answer 4

store of value, unit of account, and medium of exchange.

Question 5

M1 vs M2

Answer 5

M1 is highly liquid such as cash, checkable deposits, travelers checks. M2 is less liquid such as M1 plus savings and time deposits, certificates of deposits, and money market funds.

Question 6

interest rate risk

Answer 6

the potential that a change in overall interest rates will reduce the value of a bond or other fixed-rate investment

Question 7

supply of bonds shift due to

Answer 7

government budgets, inflation expectations, and general business conditions

Question 8

demand for bonds shift due to

Answer 8

changes in wealth, expected relative returns, risk, and liquidity

Question 9

Fisher effect

Answer 9

the description of the relationship between inflation and both real and nominal interest rates

Question 10

liquidity preference theory

Answer 10

income and the price level shift demand. The liquidity preference theory states that investors should demand a higher interest rate on longer term investments because they would prefer to have liquidity

Question 11

yield curves

Answer 11

indicator of yield on long term investments. 4 types, steep, normal, hump, inverted

Question 12

asymmetric information

Answer 12

one party in a transaction is in possession of more information than the other.

Question 13

adverse selection

Answer 13

a situation where asymmetric information (between buyers and sellers) causes unwanted results, because the unobserved attributes lead to an undesirable selection from the perspective of the uninformed party. Or, the lemons problem

Question 14

moral hazard

Answer 14

lack of incentive to guard against risk where one is protected from its consequences, e.g. by insurance or corporate bailouts

Question 15

financial crises causes

Answer 15

unscrupulous investment banking and insurance practices, low interest rates, easy credit, insufficient regulation, and toxic subprime mortgages…

Question 16

particulars of recent financial crisis

Answer 16

Deregulation in the financial industry was the primary cause of the 2008 financial crash. It allowed speculation on derivatives backed by cheap, wantonly-issued mortgages, available to even those with questionable creditworthiness. Causes a growing housing bubble to burst, causing Lehman Brothers to go bankrupt with no bailout from the government due to their unscrupulous and aggressive investing strategy. Big blowback of moral hazard

Question 17

banking safety nets

Answer 17

‘safety nets’ refer to government guarantees provided to depositors and sometimes to all bank creditors

Question 18

Fed mandate

Answer 18

promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

Question 19

time-inconsistency problem

Answer 19

Time-inconsistency describes situations where, with the passing of time, policies that were determined to be optimal yesterday are no longer perceived to be optimal today and are not implemented.

Question 20

political business cycle

Answer 20

political business cycle is the hypothesized tendency of governments to adopt expansionary fiscal policies, and often monetary policies as well, in election years. Example is tax-cuts

Question 21

basic structure of the federal reserve system

Answer 21

a central authority called the Board of Governors located in Washington, D.C., and a decentralized network of 12 Federal Reserve Banks located throughout the U.S.

Question 22

federal reserve balance sheet

Answer 22

what the Federal Reserve (Fed) owns and owes

Question 23

how the fed can inject reserves into the banking system

Answer 23

1. increase reserve requirement
2. increase in the size of the Fed’s balance sheet through purchasing securities.
3. buy bonds

Question 24

monetary base vs M1

Answer 24

In comparison to the money supply, the monetary base only includes currency in circulation and cash reserves at a bank. In contrast, the money supply is a broad term that encompasses the entire supply of money in a country.

Question 25

money multiplier how it changes

Answer 25

size of the multiplier depends on the percentage of deposits that banks are required to hold as reserves. When the reserve requirement decreases, the money supply reserve multiplier increases and vice versa.

Question 26

how the money multiplier has changed recently

Answer 26

since their is n longer a reserve requirement, the money multiplier has become larger

Question 27

Taylor rule

Answer 27

a guide for banks to alter interest rates due to the economy. recommends that the Federal Reserve should raise interest rates when inflation or GDP growth rates are higher than desired.

Question 28

forward guidance

Answer 28

refers to the communication from a central bank about the state of the economy and likely future course of monetary policy.

Question 29

quantitative easing

Answer 29

a monetary policy whereby a central bank purchases predetermined amounts of government bonds or other financial assets in order to inject money into the economy to expand economic activity.