Unit 3: Monetary and Fiscal Policies

Question 1

What is the basic pro and con of competitive arm’s length mode of financing?

Answer 1

• Pro: it is cheaper and less biased
• Con: It is very difficult to sustain

Question 2

What is “rule of law”?

Answer 2

The rule of law is the legal principle that law should govern a nation, as opposed to being governed by arbitrary decisions ofindividual government officials.

Rule of law implies that every citizen is subject to the law, including law makers themselves. In this sense, it stands in contrast to anautocracy, dictatorship, or oligarchy where the rulers are held above the law.

Question 3

What are the 2 main ways financing can be done in the private sector?

Answer 3

1. Competitive arm’s length mode - relies heavily on the promt and unbiased enforement of contracts
2. Relationship-based mode - relies on the financier retaining some kind of monopoly over the firm they finance

Question 4

Why is it important for financial workers to detect and eliminate fraud?

Answer 4

because fraud in the financial sector can have devastating effects on the reputation and function of the industry.

Question 5

What is the impartiality principle?

Answer 5

Impartiality (also called evenhandedness or fair-mindedness) is a principle of justice holding that decisions should be based on objective criteria, rather than on the basis of bias, prejudice, or preferring the benefit to one person over another for improper reasons.

Question 6

What is the difference between an activity’s social return and a private return?

Answer 6

A social return provides benefit to society (or a large group of people).

A private return provides benefit to one person (or a small group of people).

Question 7

True or false:

If a lender does not expect their contract ot be enforced by law they will never extend arm’s length credit.

Answer 7

True.

Question 8

Why is it difficult for financial industry workers to gain high regard in society?

Answer 8

Because private returns are easy to measure in comparison to social returns. Additionally, wealth accumulation for financial workers is often faster and larger in comparison to other workers.

Question 9

What does “exogenous” mean?

Answer 9

developed or caused by an external source.

Question 10

_______ , generally, is the primary function of Government.

Answer 10

Redistribution

Question 11

In the U.S. and Canada, government purchase of “public goods” represents approximately _____ % of GDP.

Answer 11

20%

Question 12

What is “Monetary Policy”?

Answer 12

Adjusting the supply of money in the economy to achieve some combination of inflation and output stabilization

Question 13

When Central Banks lower their interest rates inflation should subsequently <lower/rise/not change>?

Answer 13

Lower

Question 14

What is Quantitive Easing (QE)?

Answer 14

The act of Central Banks creating (printing) money to purchase public and private assets.

Question 15

True or false:

Raising Central Banks’ borrowing interest rate is considered loosening monetary policy.

Answer 15

False

Question 16

True or false:

Lowering Central Banks’ borrowing interest rate is considered loosening monetary policy.

Answer 16

True

Question 17

The argument to have a Central Bank, independent of elected government officials, that controls Monetary Policy is

Answer 17

because Government Officials may change policy to meet short term promises vs. maintain long term benefit.

Question 18

What is a Spillover?

Answer 18

An unintended or unforseen effect from known economic activity or intentional economic intervention.

Question 19

Who are the Systemic Four (S4) Central Banks?

Answer 19

• U.S. - Federal Reserve System (or The Federal Reserve.. or “The Fed”)
• Europe - European Central Bank (ECB)
• Japan - Bank of Japan (BoJ)
• U.K. - Bank of England (BoE)