Lecture 2

Question 1

when was the rapid decline in housing prices?

Answer 1

2006

Question 2

what was the impact of rising interest rates in 2006?

Answer 2

many homeowners weren’t able to make their mortgage loan repayments

Question 3

what happened to mortgage backed securities when housing prices declined?

Answer 3

mortgage backed securities declined in value

financial institutions had inadequate equity due to loss in value of their MBS

Question 4

what does MBS stand for?

Answer 4

mortgage-backed securities

Question 5

what caused a credit crunch?

Answer 5

financial institutions having inadequate capital

Question 6

what did federal government do to help solve the financial crisis?

Answer 6

they bailed out financial institutions

Question 7

what are economic units?

Answer 7

individuals, business firms or governments

Question 8

what is a surplus economic unit?

Answer 8

generate more money than they spend

Question 9

what is a deficit economic unit?

Answer 9

generate less money than they spend

Question 10

what is the savings-investment process?

Answer 10

involve the direct or indirect transfer of individual savings to business firms in exchange for debt and equity securities of the firm

Question 11

what are the two indirect transfers in the savings-investment process

Answer 11

1. savers to investment banking firm to business firm
2. savers to financial institution to business firm

Question 12

what is the direct transfer in the savings-investment process

Answer 12

savers to business firms

Question 13

how does the US monetary system work?

Answer 13

central bank regulates money supply and facilitates the transfer of money to feed into the banking system

Question 14

what are the roles of the banking system?

Answer 14

creates money
transfers money
provides financial intermediation
process/clears checks

Question 15

define reserves

Answer 15

represents the money held by the bank so that it can pay off checks

Question 16

what are the types of assets?

Answer 16

real assets
financial assets

Question 17

what are real assets?

Answer 17

direct ownership of tangible asset (e.g., land, buildings, equipment, invesntories)

Question 18

what are financial assets?

Answer 18

money, debt securities and financial contracts, and equity securities that are backed by real assets & the earning power of issuers

Question 19

what is money?

Answer 19

a physical or electronic asset that is accepted for goods or the repayment of debts

Question 20

what are the functions of money?

Answer 20

medium of exchange
standard of value
store of value

Question 21

explain medium of exchange

Answer 21

the basic form of money being exchanged for goods/services

Question 22

explain standard of value

Answer 22

occur when prices and debts are stated in terms of the monetary unit

Question 23

explain store of value

Answer 23

money held for some period of time before it’s spent

Question 24

define liquidity

Answer 24

how easily an asset can be converted into cash or other assets

Question 25

define purchasing power

Answer 25

amount of goods/services that can be purchased with a unit of money

Question 26

define inflation

Answer 26

the increase in the price of goods/services which isn’t offset by an increase in quality

Question 27

what are money markets?

Answer 27

where debt securities with less than 1 year are traded

Question 28

what is a treasury bill?

Answer 28

short-term debt obligation issued by the US federal government

Question 29

what are UK government bonds called?

Answer 29

gilts

Question 30

what is commercial paper?

Answer 30

short-term unsecured note issued by a high credit-quality corporation

Question 31

what is a negotiable certificate of deposit (negotiable CD)

Answer 31

short term debt instrument issued by depository institutions, traded in the secondary markets

Question 32

what is banker’s acceptance?

Answer 32

promise of future payment issued by an importing firm and guaranteed by a bank (up to 6 months)

Question 33

what is repurchase agreement?

Answer 33

short-term debt security where the seller agrees to repurchase the security at a specified price and date

Question 34

what are federal funds?

Answer 34

very short-term loans between depository institutions with excess funds and those with a need for funds

Question 35

what is M1 all about?

Answer 35

money as a medium of exchange

Question 36

what is M2 all about?

Answer 36

money as a medium of exchange plus highly liquid financial assets (as a store of value)

Question 37

what are demand deposits?

Answer 37

commercial banking checking accounts

Question 38

what is GDP?

Answer 38

gross domestic product

a measure of the output of goods and services in an economy

Question 39

what is VM?

Answer 39

velocity of money

the rate of circulation of the money supply

Question 40

what is MS?

Answer 40

money supply

Question 41

what is the basic equation for monetarists view?

Answer 41

MS x VM = GDP

money supply x velocity of money = gross domestic product

Question 42

what is an alternative way that GDP can be calculated?

Answer 42

RO x PL = GDP

real output x price level = gross domestic product

Question 43

credit crunch = ?

Answer 43

a sudden sharp reduction in the availability of money or credit from banks and other lenders