Midterm 2 Flashcards
The basic purpose of financial markets is:
to buy commodities from firms and the government to sell to the public
In financial markets, the sellers are:
people or organizations that have cash on hand and are willing to let others use it for a price
In financial markets, the buyers are:
people or organizations that have a need to spend on something now but don’t have cash on hand to do so
When my subjects have money left over after spending, they want to keep it somewhere safe and earn some interest on it. But that’s hard for most of them because they have no way of finding out who wants to borrow and whether it would be a good idea to lend to them.”
In this situation, banks could:
intermediate between savers and borrowers
“My subjects are lucky that we have very little crime, so they can safely keep their extra money inside their houses and take only what cash they need for a day’s spending. However, many of them have complained that if an emergency occurs when they’re all the way on the other side of the island, they can’t access their funds.”
In this situation, banks could:
provide liquidity
“Some of my subjects who are in the know about good borrowers have been making loans and earning interest. But lately there have been a couple of borrowers who defaulted on loans, and when they did, the lenders were totally out of luck. All that money just disappeared! And those bad experiences have made other potential lenders afraid, so that now borrowing and lending have dried up almost completely. If only there were some easy way for them to divide their savings among several different borrowers, they might feel safe enough to start lending again!”
In this situation, banks could:
diversify risk
Categorize each of the following as a type of savings or investment in the economic sense.
a. You buy 100 shares of RBC stock
Savings
Categorize each of the following as a type of savings or investment in the economic sense.
b. You place part of your income in a mutual fund
Savings
Categorize each of the following as a type of savings or investment in the economic sense.
c. A delivery service buys 1,000 new trucks
Investment
Categorize each of the following as a type of savings or investment in the economic sense.
d. You put $1,000 in a fixed term deposit by giving money to the bank in exchange for a set amount of return
Savings
When Collins Inc. uses the proceeds from issuing bonds to purchase equipment needed to start a new product line, it is an example of:
Investment
If Daisy buys some of the Collins Inc. bonds, her purchase is an example of:
Savings
What is a way to describe the risk of a financial asset?
Standard deviation
An example of a seller in a financial market would be:
individuals who have a savings account
If a government encourages saving among its citizens, there will be:
- lower interest rates
- a higher level of investment
- investment and economic growth
Does the level of taxation in a closed economy have an impact on national savings?
No. Taxes increase public savings but decrease private savings
A bank allows us to diversify risk because:
it has a big pool of borrowers and savers, so the risk of repayment is spread among many
The market for loanable funds is a market in which:
savers supply funds to those who want to borrow for their investment spending needs
If Howard takes out a $400 loan for one year at 5 percent interest annually, he will pay back a total of:
$420
The fact that Canadian citizens expect to receive retirement benefits through Social Security and universal healthcare pushes their:
supply of loanable funds further left than it would otherwise be
If citizens expect to bear more of the burden for their own health care and retirement costs in the future, then we would expect their:
supply of loanable funds further right than it would otherwise be
One of the functions of money is to serve as a:
- store of value
- medium of exchange
- unit of account
Say whether each of the following are types of M1 or M2, or both.
a. Chequable deposits:
M1 and M2
Say whether each of the following are types of M1 or M2, or both.
b. Dollar bills:
M1 and M2
Say whether each of the following are types of M1 or M2, or both.
d. Money in your savings account:
M2
Say whether each of the following are types of M1 or M2, or both.
c. Money in your chequing account
M1 and M2
Say whether each of the following are types of M1 or M2, or both.
e. Term deposit under $100,000:
M2
Say whether each of the following are types of M1 or M2, or both.
f. Traveler’s cheques:
M1 and M2
Money contributes to economic activity and allows for a more complex society than barter does because:
barter is inefficient. Each time you want to make a trade, you have to find a partner who has something you want and wants what you have to offer.
We say that money is a store of value because it represents:
a certain amount of purchasing power held over time.
When deciding what to use as money, one characteristic to look for is:
the stability of value
The main reason barter is extremely inefficient is that:
you have to find someone who both has what you want and wants what you have
Commodity-backed money is:
any form of money that can be legally exchanged into a fixed amount of an underlying commodity
Fiat money is:
money created by rule
The primary way that banks earn money is:
through lending funds and collecting interest on those loans
The ratio of the total amount of demand deposits at a bank to the amount kept as cash reserves is known as:
the reserve ratio
Banks create money in the economy by:
loaning out part of each deposit, which will be redeposited by someone else
If the reserve ratio was 100 percent, then:
no lending would occur using deposits
The larger is the reserve ratio, the:
smaller is the money multiplier, and the less money will be created in the economy.
The money supply is:
the amount of money available in the economy.
Liquidity refers to:
how easy an asset is to convert immediately to cash without losing value
The definition of M1 includes:
cash and chequing account balances
The definition of M2 includes:
cash, chequing accounts, savings accounts, and other financial instruments where money is locked away for a specified period of time.
Your savings account balance would be counted in which measure of money?
M2
In Canada, the central bank is the:
Bank of Canada
An essential function of a central bank is to:
manage the money supply
If a central bank wanted to increase the money supply, they could:
decrease the reserve requirement, reducing the reserve ratio
If the Bank of Canada wishes to increase the money supply, it can:
buy a bond from a bank, giving the bank cash in return, which it can then lend out
The most used tool of the Bank of Canada is:
the overnight lending rate
Open-market operations are:
sales or purchases of government securities, by The Bank of Canada to or from banks on the open market.
If the Bank of Canada wishes to decrease the money supply, it could:
sell a bond
Contractionary monetary policy involves:
actions that reduce the money supply in order to decrease aggregate demand.
When the Bank of Canada buys bonds through open market operations, it gives banks money in return, which:
increases their ability to lend, and increases aggregate demand
Monetary policy primarily influences the economy through changes in:
the interest rate
Which of the following would cause the money demand curve to shift to the right?
Inflation
Which of the following would cause the money demand curve to shift to the left?
A technological advance, like online shopping
An increase in interest rates:
decreases aggregate demand, slowing economic activity.
If the Bank of Canada wishes to slow economic activity, it might actively pursue:
contractionary monetary policy
If the Bank of Canada wishes to slow economic activity, it might actively pursue:
contractionary monetary policy
If the economy is in a recession, the Bank of Canada could:
buy bonds through open market operations to increase spending in the economy
Expansionary monetary policy:
decreases the interest rate and increases the price level
Deflation is:
an overall decline in prices in the economy
The quantity theory of money states explicitly that:
the value of money is determined by the overall quantity of money in existence
According to the quantity theory of money, changes in the price level are primarily the result of changes in the:
quantity of money
According to the quantity theory of money, if there are fewer dollars available to spend on the same number of goods and services, then:
the price level will fall
The quantity theory of money relies on which variable to remain constant?
Velocity of money
The number of transactions a typical dollar is used in during a given period is called the:
velocity of money
If an economy produces 1,000 units of output with a price level of $1 and the money supply (M) is $500, velocity is:
2
If an economy produces 3,000 units of output with a money supply of $500 and a velocity of 9, we know the price level must be:
$1.50
According to the quantity theory of money, if the economy were facing inflation, the Bank of Canada could combat it by:
decreasing the supply of money
Demand pull inflation occurs when:
the price level changes in response to changes in the business cycle
The real interest rate is
adjusted for inflation
If the value of your savings is increasing over time, it must be true that:
the inflation rate is lower than the nominal interest rate
Suppose the nominal interest rate is 7 percent annually, and you deposit $1,000. Inflation in the economy throughout the year is 7 percent. At the end of the year, you have earned:
no increase in your purchasing power
If the real rate of return is 5 percent, and the inflation rate is 2 percent, then the nominal interest rate must be:
7%
When an economy experiences deflation, consumption:
will decrease, because people will want to wait for prices to drop before spending
The net result of deflation is to:
decrease consumption and investment, decreasing aggregate demand
The Phillips Curve depicts that, in general:
high amounts of unemployment in an economy will coincide with low inflation.
The Phillips Curve will shift because of:
expected inflation
The lowest possible unemployment rate that will not cause the inflation rate to increase is called:
the nonaccelerating inflation rate of unemployment (NAIRU)
The Bank of Canada’s mandate is to:
maintain full employment and maintain price stability
The short-run Phillips Curve is _________, and the long-run Phillips Curve is ________.
downward sloping; vertical
