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Question 1

what is a financial market

Answer 1

Financial markets are markets where funds are transferred from lender-savers (people with excess funds) to borrower-spenders (people with a shortage of funds)

Question 2

What role do financial markets play in the economy? (4)

Answer 2

Facilitate the transfer of funds between economic agents.

Influence personal wealth.

Affect the behavior of households and firms.

Impact the cyclical performance of the economy.

Question 3

How do financial markets affect personal wealth? (3)

Answer 3

Financial markets provide investment opportunities, allowing individuals to:

Earn returns on savings.

Increase their net worth.

Manage financial risks through diversification.

Question 4

why study money, banking and financial markets

Answer 4

• To understand how financial markets markets operate
• To examine how financial institutions work and their roles.
• To examine the role of money and monetary policy in the economy.

Question 5

examples of financial markets (3)

Answer 5

Bond market

Stock market

Foreign exchange market

Question 6

What is the role of the bond market?

Answer 6

The bond market determines interest rates and allows governments, businesses, and individuals to borrow money by issuing debt securities.

Question 7

What is the role of the stock market?

Answer 7

The stock market allows companies to raise capital by issuing shares and provides investors opportunities to gain returns through stock ownership. It influences wealth and investment decisions.

Question 8

What is the foreign exchange (FX) market?

Answer 8

The FX market determines foreign exchange rates, allowing currencies to be exchanged and impacting international trade and investments.

Question 9

what is a security (financial instrument)?

Answer 9

A security is a claim on the issuer’s future income or assets, such as stocks, bonds, or derivatives.

Question 10

what is a bond

Answer 10

A bond is a financial instrument that represents a loan made by an investor to a borrower (typically a corporation, government). It is a fixed-income security that pays periodic interest and returns the principal (face value) at maturity.

Question 11

what are interest rates

Answer 11

An interest rate is the cost of borrowing or the price paid for the rental of funds

Question 12

What does common stock represent?

Answer 12

Common stock represents a share of ownership in a corporation.

Question 13

What is a share of stock?

Answer 13

A share of stock is a claim on the earnings and assets of a corporation.

Question 14

Why do firms issue stock?

Answer 14

Firms issue stock to raise funds for financing their productive activities.

Question 15

what is a foreign exchange market

Answer 15

• The foreign exchange market is where funds are converted from one currency into another.

Question 16

what is the foreign exchange rate

Answer 16

• The foreign exchange rate is the price of one currency in terms of another currency.
• The foreign exchange rate is determined in the foreign exchange market (serious fluctuations occur in the FX market)

Question 17

How do changes in a country’s home currency affect consumers and firms?

Answer 17

Changes in currency value affect:

Cost of imports
Cost of exports
Demand for foreign-produced goods
Demand for home-produced goods

Question 18

What happens when a country’s home currency appreciates (increases in value)?

Answer 18

Imports become cheaper
Exports become more expensive
Demand for foreign goods increases
Demand for home goods decreases

Question 19

What happens when a country’s home currency depreciates (loses value)?

Answer 19

Imports become more expensive
Exports become cheaper
Demand for foreign goods decreases
Demand for home goods increases

Question 20

How does currency fluctuation impact international trade?

Answer 20

A stronger currency makes exports less competitive, while a weaker currency makes exports more attractive to foreign buyers.

Question 21

what are Financial intermediaries

Answer 21

Financial intermediaries are institutions that borrow funds from savers and lend them to borrowers.

Question 22

What is the largest type of financial intermediary?

Answer 22

Banks are the largest financial intermediaries. They accept deposits and make loans.

Question 23

what are other financial institutions (5)

Answer 23

Insurance companies
Finance companies
Pension funds
Mutual funds
Investment banks

Question 24

How does money supply play a role in generating business cycles?

Answer 24

Changes in the money supply can affect aggregate economic activity and the price level, influencing the business cycle (recessions and booms).

Question 25

What characterizes a recession and a boom in terms of unemployment and inflation?

Answer 25

Recessions: high unemployment-low inflation booms: low unemployment-high inflation

Question 26

How does monetary theory explain business cycles?

Answer 26

Monetary theory links changes in the money supply to changes in aggregate economic activity and the price level, influencing business cycles.

Question 27

what is monetary policy

Answer 27

- Monetary policy is the management of the money supply and interest rates Conducted by a central bank (Bank of England in the UK, the Federal Reserve Bank (Fed) in the US)

Question 28

what is fiscal policy

Answer 28

Fiscal policy is the management of government spending and taxation.

Question 29

What is a budget deficit and surplus?

Answer 29

A budget deficit occurs when the government’s expenditures (G) exceed its revenues (T) in a given year. deficit is financed by borrowing which leads to government debt A budget surplus occurs when the government’s revenues (T) exceed its expenditures (G) in a given year.

Question 30

What is aggregate output

Answer 30

Aggregate Output refers to Gross Domestic Product (GDP), which is the market value of all final goods and services produced in the domestic economy during a single year.

Question 31

what is aggregate income

Answer 31

Total income of the factors of production (land, capital, labour) from producing goods and services in the economy during a single year.

Question 32

what is the distinction between nominal and real GDP

Answer 32

Nominal GDP is the value of goods and services measured using current prices. Real GDP is the value of goods and services measured with constant prices (adjusted for inflation).

Question 33

why does NGDP increase over time

Answer 33

Production of goods increases Prices of most goods also increase

Question 34

what is RGDP per capita

Answer 34

the ratio of real GDP to the population of the country.

Question 35

How do you calculate the Growth Rate of GDP?

Answer 35

The Growth Rate of GDP is calculated as: gY = [(Yt − Yt−1) / Yt−1] ×100 Yt = GDP in the current year Y{t-1} = GDP in the previous year

Question 36

What is the difference between expansions and recessions in terms of GDP growth?

Answer 36

Expansions: Periods of positive GDP growth. Recessions: Periods of negative GDP growth.

Question 37

what is the aggregate price level

Answer 37

the average price of goods and services in an economy

Question 38

What is the formula for the aggregate price level?

Answer 38

P= ∑(Pi×Qi) / ∑Qi ​ P= aggregate price level pi = price of individual goods and services 𝑄𝑖 = quantity of individual goods and services

Question 39

what is a GDP deflator

Answer 39

The GDP Deflator is the ratio of nominal GDP to real GDP in year 𝑡. It acts as an index number, with a value of 100 in the base year. It measures the overall level of prices in an economy, showing how much prices have increased compared to the base year.

Question 40

What is the formula for the GDP Deflator in year t?

Answer 40

Pt= [Nominal GDP in year t/Real GDP in year t]×100

Question 41

what is infaltion

Answer 41

Inflation is a sustained rise in the general level of prices (price level). Inflation rate is the rate at which the price level increases.

Question 42

how is inflation calculated

Answer 42

[Price Level Current Year−Price level Previous Year / Price Level Previous Year] x100

Question 43

what is consumer price index

Answer 43

The Consumer Price Index (CPI) measures the average price of goods and services consumed by households. It tracks the cost over time of a specific list of goods and services representing the consumption basket of a typical urban consumer.

Question 44

How is the CPI different from the GDP deflator?

Answer 44

The CPI focuses on the prices of goods and services consumed by households, while the GDP deflator reflects the prices of all goods and services produced in the economy. CPI does not include goods sold to firms, the government or to foreigners. The CPI includes imports but excludes exports whereas the GDP deflator exports but excludes imports