Financial System

Question 1

Financial markets

Answer 1

stocks and bonds

- used in direct financing

Question 2

Financial intermediaries

Answer 2

banks, insurance companies, mutual funds

- used in indirect financing

Question 3

bond (compared to stocks)

Answer 3

safer than stocks, but have a lower rate of return

Question 4

stocks (compared to bonds)

Answer 4

riskier than bonds, have a higher rate of return, shows partial ownership, value of stocks generally increase

Question 5

bond

Answer 5

as if you made a loan to a company, you know how much you will get back and when you will get this money back, generally a safe investment

Question 6

relationship between bond price and interest rate

Answer 6

indirect

Question 7

3 problems with direct financing

Answer 7

1) smaller borrowers can’t raise money through direct borrowing (not reputable enough)
2) small savers can’t diversify (need 20+ stocks to diversify and that cost hella bank)
3) direct lending by small savers is risky

Question 8

commercial banks

Answer 8

• collect deposits from lots of households
• uses $ to make a portfolio of loans
• make loans that are least risky (willing to lend to small borrowers)
• gives small savers a safe way to indirectly lend

Question 9

mutual funds

Answer 9

• collect funds from many households
• uses $ to make a portfolio of stocks and bonds
• allows small savers to diversify

Question 10

Simplifying GDP

Answer 10

Y=GDP
closed economy (NX=0)

Question 11

national saving

Answer 11

national income- national spending for current enjoyment
S=Y-C-G=I
-some G isn’t for current enjoyment (new road)