Econ Ch 3

Question 1

The finanaal system channels from savers to borrowers

Answer 1

① households borrow to Finance purchases ② firms borrow to pay workers & upgrade capital.③ gov borrow to build roads, schools, & bridgesto purchase g &s & to make payments

Question 2

Financial system

Answer 2

Financial markets & financial intermediaries

Question 3

Financial market

Answer 3

Place I channel for buying financial securities

Question 4

Financial securities

Answer 4

Tradeable financial assets [ bought & sold in markets]

Question 5

Asset

Answer 5

Anything of value owned by a person or firm

Question 6

Financial assets

Answer 6

A financial claim

Question 7

Stock

Answer 7

A financial security that represents a legal claim on a share in the profits and assets on the firm

Question 8

Bond

Answer 8

A financial security issued by a corporation or in government that represents a promise to repeat a fixed amount of funds

Question 9

Securization

Answer 9

Process of converting loans & other assets that aren’t tradeable into securities

Question 10

Information

Answer 10

The financial system gathers facts about borrowers & expectations on returns & communicates that info to lenders & investors

Question 11

Ay symmetric information

Answer 11

One party has more info than another

Question 12

Adverse selection

Answer 12

One party to a transaction takes advantage of knowing more than another party

Question 13

Moral hazard

Answer 13

Actions people take after they have entered intoa transaction that make another party in the transaction worse off

Question 14

Central Banks are established to be a “bankers bank” some functions performed:

Answer 14

1 regulate money supply ② LAST resort lender for banks ③ act as gov bank by playing role in collection & redistribution of gov funds ④ regulate financial system ⑤ facilitate payment by providing banks W/ cheque clearing & other services

Question 15

Financial crisis

Answer 15

Significant disruption in the flow of funds from lenders to borrowers

Question 16

Leverage

Answer 16

A measure of how much debt an investor takes on in making an investment

Question 17

Leverage=

Answer 17

Total assets ÷ capital

Question 18

Return on investment

Answer 18

Return on the asset * leverage

Question 19

Fractional reserve banking system

Answer 19

Banks keep less than 100% of deposits on hand in the form of reserves

Question 20

Reserves

Answer 20

Sum of funds physically present in the bank or on deposit W/ the bank of Canada

Question 21

Bank run

Answer 21

Process by which depositors who have lost confidence in a bank simultaneously withdraw their funds

Question 22

Bank panic

Answer 22

Banks experience runs at all once

Question 23

Insolvency

Answer 23

Situation in which the value of an asset held him I think the clients to less than the value of its liabilities leaving the bank with a negative net worth

Question 24

Contagion

Answer 24

The process by which a run on one financial institution spreads to other financial institutions resulting in a financial crisis

Question 25

GOV has 2 main ways to help avoid bank panics

Answer 25

① Central bank as last resort lender ② gov can insure deposits

Question 26

Present value one year into future

Answer 26

= future value +1 ÷ [1+ i ]

Question 27

PV. =

Answer 27

[ Future value + n ]÷ [ 1 + i ]^n

Question 28

Risk structure of interest rates

Answer 28

Relationship among interest rates on bonds that have diff characteristics but same maturity

Question 29

Inverted yield curve

Answer 29

. The yield curve can slow down with investors investors expect future short-term rates to be significantly lower than current short-term rates

Question 30

Term premium

Answer 30

The additional interest investors required in order to be willing to buy a long term bond and set up a comparable sequence of short term bonds

Question 31

The higher a bank’s leverage

Answer 31

The less of its own capital it has exposed

Question 32

If the c d i c increase moral hazard why was it set up? How else may they deal W/ panics

Answer 32

An effort to prevent panics / act as a lender of last resort, institute 100% reserve banking

Question 33

Why is $200 you will receive in one year more worth than in 3 years

Answer 33

All of the above

Question 34

Time value of money

Answer 34

The way that the value of a payment changes depending on when the payment is received

Question 35

Risk structure o interest rates refers to the relationship

Answer 35

Among interest rates ON bonds that have different characteristics but same maturities