Review Sheet 1

Question 1

What three roles does the government have to limit the fallout from the banking crisis?

Answer 1

1. Regulate the shadow banks. 2. Limit the amount of loans they can give out. 3. Providing insurance for depository banks: liquidity.

Question 2

Banking crisis always involve:

Answer 2

1. Unemployment. 2. Financial panic.

Question 3

What’s ‘’maturity transformation’’?

Answer 3

When you take money earned from a short-run investment and turn it in to a long-term stable investment.

Question 4

What’s the idea of Efficient Market Hypothesis?

Answer 4

The Efficient Market Hypothesis is that everyone has the same information about the market. The information about the market is what effects the supply and demand and makes prices go up and down.

Question 5

What’s the true cost of borrowing and the true payoff to lending?

Answer 5

It’s the real interest rate, not the nominal interest rate.

Question 6

What’s the conditional hypothesis?

Answer 6

It’s that the richer countries invest in poor countries structure and that’s what help these poor countries to grow faster. It can help the rich countries also, but it’s a slow investment - it takes time.

Question 7

What’s the convergence hypothesis?

Answer 7

Countries with a lower GDP tends to have a higher growth rate every year. It’s expected to be so because: countries with a lower GDP can just do the same as the country with the higher GDP. Chile just do the same things as USA does while USA has to invent new things to higher their GDP more.

Question 8

What’s the Malthusian Crisis?

Answer 8

The Malthusian Crisis is when there comes to a point where the population growth outgrows the agriculture.

Question 9

Why do we use Real GDP?

Answer 9

Because we want to separate the effect of a rising price level.

Question 10

Why is GDP problematic as a measure of output and welfare? Underground Economy:

Answer 10

You can’t measure internal trading, personal farming and so fourth. Look at Africa.

Question 11

Why is GDP problematic as a measure of output and welfare? Nonpriced Production:

Answer 11

Pretty much the same as A.

Question 12

Why is GDP problematic as a measure of output and welfare? Leisure:

Answer 12

It doesn’t take in to account the hours worked for the money and so forth.

Question 13

Why is GDP problematic as a measure of output and welfare? Environmental Costs:

Answer 13

It doesn’t take in to account how much the society suffers from the pollution/the production.

Question 14

Why is GDP problematic as a measure of output and welfare? Distribution of Income:

Answer 14

1% of U.S. controls 99% of the economy.

Question 15

What’s three ways to measure GDP?

Answer 15

• Adding up total value of all final goods and services produced.
• Adding up spending on all domestically produced goods and services.
• Adding to total factor income earned by households from firms in economy.

Question 16

What counts in GDP and what does not?

Answer 16

GDP is the total value of all final goods and services produced in an economy during a given period, usually a year. Intermediate goods and services does not count in GDP. GDP = C (consumption spending) + I (investment) + G (government spending) + (X (Export Reciepts) - M (Import Payments))

Question 17

What’s the main reason for rise in productivity?

Answer 17

Psychical Capital, Human Capital and Technological Progress.

Question 18

What did Lehman Brothers borrow heavily?

Answer 18

Lehman Brothers borrowed heavily in the short-term market to finance it’s short term loans.

Question 19

Lehman Brothers was one of the top investment banks in 2008 by trading:

Answer 19

Securitizations

Question 20

What’s GNP?

Answer 20

GNP is a measure of a country’s economic performance, or what its citizens produced (i.e. goods and services) and whether they produced these items within its borders.

Question 21

What are the three tasks of a financial system?

Answer 21

• Reducing Transactions Costs
• Reducing Risk
• Providing Liquidity

Question 22

What’s a loan?

Answer 22

t’s a lending agreement between an individual lender and a individual borrower. So a person -> bank etc.

Question 23

What’s a bond?

Answer 23

The indebted entity (issuer) issues a bond that states the interest rate (coupon) that will be paid and when the loaned funds (bond principal) are to be returned (maturity date). Interest on bonds is usually paid every six months (semi-annually).

Question 24

What’s Loan-Backed Securities?

Answer 24

Assets created by pooling individual loans and selling shares in that pool. It diversifies the risk of your assets because each asset is allowed to be sold to general investors.

Question 25

What’s a stock?

Answer 25

A stock is a share in the ownership of a company. If you buy a stock from a company, you own a small part of that company. You ownership, your share-out is depending on how the business is doing.

Question 26

What’s mutual fonds?

Answer 26

En investeringsfond är en samling av en rad olika värdepapper, ofta kallad för portfölj, som ägs av många människor tillsammans, vilka är andelsägare. Portföljen kan bestå av olika typer av aktie- eller räntebaserade värdepapper. En fondandelsägare är ägare till en del av fondens förmögenhet. Man överlåter ansvaret för hur pengarna placeras till fondförvaltaren. Denne i sin tur köper värdepapper för pengarna, och det är förvaltarens skicklighet som avgör hur bra avkastningen blir.

Question 27

f government spending exceeds tax revenue:

Answer 27

here is a budget deficit, a negative budget surplus.

Question 28

What’s dissaving?

Answer 28

When you spend more than you earn.

Question 29

What two factors cause shifts in the demand for loanable funds?

Answer 29

A. Changes in perceived business opportunities.

B. Changes in government borrowing.

Question 30

What two factors cause shifts in the supply for loanable funds?

Answer 30

A. Changes in private savings behavior.

B. Changes in net capital inflows.

Question 31

The central point of the Fisher effect is that?

Answer 31

Increase in expected future inflation drives up the nominal interest rate.