Lecture 2

Question 1

Mortgage back security

Answer 1

a type of bond representing snd investment in a pool of mortgage loans

Question 2

What are the two reasons that MBS are sold

Answer 2

1. to free up capital
2. so that investors can buy into mortgages

Question 3

Economic units

Answer 3

groups viewed in the aggregate eg. individuals, business firms or governments

Question 4

Surplus economic unit

Answer 4

generate more money that it spends resulting in excess money to save or invest

Question 5

Deficit economic unit

Answer 5

generate less money than it spends resulting in a need for additional money

Question 6

Savings investment process

Answer 6

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

Question 7

Direct transfer

Answer 7

savers directly use money to purchase the debt or equity securities of a firm in the financial markets

Question 8

Indirect transfer (investment banks)

Answer 8

a financial institution (investment bank) facilitates the process by purchasing equities first then reselling them to savers

Question 9

Indirect transfer (financial institutions)

Answer 9

savers deposit money into financial institutions (bank) then issue their own securities to the saver. they then lend money to a business firm in exchange for their securities

Question 10

Monetary system

Answer 10

responsible for creating and transferring money

Question 11

3 parts of the central bank

Answer 11

1. federal reserve system
2. board of governors
3. federal reserve banks

Question 12

2 responsibilities of the central bank

Answer 12

1. defines and regulates money supply
2. facilitates the transferring of money through check processing and clearing

Question 13

What does the banking system do (4)

Answer 13

1. creates money
2. transfers money
3. provides financial intermediation
4. processes and clears checks

Question 14

2 types of asset

Answer 14

real assets and financial assets

Question 15

Real assets

Answer 15

direct ownership of land, buildings, equipment inventories durable goods and precious metals

Question 16

Financial assets

Answer 16

money, debt securities, financial contracts and equity securities that are backed by real assets

Question 17

Money

Answer 17

a physical or electronic asset accepted as payment for goods and services

Question 18

3 functions of money

Answer 18

1. medium of exchange
2. store of value
3. standard of value

Question 19

Medium of exchange

Answer 19

the basic function of money, money must be accepted

Question 20

Standard of value

Answer 20

when prices and debts are stated in the terms of the monetary unit (£,$)

Question 21

Store of value

Answer 21

when the price / value of money remains relatively stable overtime

Question 22

Liquidity

Answer 22

how easily an asset can be exchange for money or other asset with little loss

Question 23

Purchasing power

Answer 23

amounts of goods / services that can be bought with a unit of money

Question 24

Inflation

Answer 24

increase in price of good / services that is not offset by increases in quality

Question 25

Treasury bill

Answer 25

short term debt obligation issued by US government (91 days to 1 year)

Question 26

Commercial paper

Answer 26

short term unsecured noted issued by high credit quality corporation

Question 27

Negotiable certificate of deposit

Answer 27

short term debt instrument issued by depository institutions and traded in secondary market

Question 28

Bankers acceptance

Answer 28

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

Question 29

Federal funds

Answer 29

very short term loans between depository institutions with excess funds and those with a need for funds (1 day to 1 week)

Question 30

Repurchase agreement

Answer 30

short term debt security where seller agrees to repurchase security at specified rate and dates

Question 31

What 4 things does the M1 money supply consist of

Answer 31

1. currency 2. demand deposits 3. travellers checks 4. other checkable deposits

Question 32

What 4 things does the M2 money supply consist of

Answer 32

1. M1 2. savings accounts 3. small denomination time deposits 4. retail money market mutual funds

Question 33

2 exclusions from money supply

Answer 33

1. stock and bond mutual funds 2. credit cards

Question 34

GDP

Answer 34

measure of output of goods and services in an economy

Question 35

Velocity of money

Answer 35

the rate of circulation of the money supply

Question 36

Monetarists view

Answer 36

amount of money in circulation determines the level of GDP / economic activity

Question 37

Keynesians view

Answer 37

change in MS cause change in interest rates which alters demand for goods causing GDP to grow

Question 38

Monetarists view equation

Answer 38

GDP = MS x VM

Question 39

Other equation for GDP

Answer 39

GDP = RO x PL

Question 40

Equations combines

Answer 40

MS x VM = RO x PL