Quiz Mistakes Flashcards
What is the difference between moral hazard and adverse selection?
Adverse selection arises before the transaction occurs; it is the inability of lenders to distinguish good from bad credit due to asymmetric information
Moral hazard occurs after the transaction; it arises due to asymmetric information too, and is when lenders can’t tell if borrowers will use the proceeds of a loan as they claim they will
What are dealers?
Intermediaries who link buyers and sellers by buying and selling securities at stated prices
What is the CPI?
A fixed expenditure weight index used to measure changes in purchasing power for households
Explain how a trader can profit by short selling?
They borrow some shares, sell them at price X. The trader has to return these shares to the original owner, so if the price of the shares fall and they buy them back for price X-5 then they have made $5 on each share - if the price rises they lose money, and if it stays the same they also lose money since they will pay some kind of interest on the borrowing of the stock
Difference between future and forward?
A FUTURE is a contract that has been standardised and sold through an exchange
A FORWARD is the original single contract
What happens when someone withdraws money from an ATM?
It raises the currency liability of the central bank and leaves the size of the balance sheet the same
How will an increase in the discount rate affect the federal funds rate?
It won’t
What is the main way the ECB provides reserves to the banking system?
Through refinancing operations
How is the target federal funds rate controlled?
The supply of reserves are adjusted through open market peo rations to meet expected demand at the target rate
What is the euro area’s equivalent of the market federal funds rate?
The overnight cash rate
Important way to remember a bank can manage liquidity risk?
By adjusting:
Assets
Liabilities
Explain the process of an overnight repo?
Day 1) bank sells US treasury bill to pension fund in exchange for cash
Day 2) bank REPURCHASES US treasury bill from the pension fund in exchange for cash plus interest
