Econ-Chapter 8

Question 1

The true suppliers of loanable funds are

Answer 1

consumers and businesses that save, banks are intermediaries

Question 2

interest rate

Answer 2

savers are paid for delaying consumption until the future, by borrowers, who wish to consume or invest more in the present and will later pay for that privilege-the price they pay is this

Question 3

direct finance

Answer 3

a borrower deals directly with the lender

-selling of bonds

Question 4

maturity

Answer 4

the date that the payment will be made to the lender

Question 5

face value

Answer 5

the value paid at maturity

Question 6

zero coupon bond

Answer 6

seller makes no interest payments

Question 7

coupon rate

Answer 7

making interest payments twice a year until maturity, would have this quoted on it

Question 8

indirect finance

Answer 8

when individuals and businesses use middlemen, such as banks, for borrowing and lending, they are engaging in this

Question 9

financial intermediaries such as banks:

Answer 9

• spread the risk of non-payment
• develop comparative advantages in credit
• divide denominations of loans
• match time preferences

Question 10

high interest rates

Answer 10

the greater rewards encourage more saving-larger quantity of loanable funds is supplied

the higher cost of consumption and investment discourages borrowing-a lower quantity of loanable funds is demanded

Question 11

borrowers prefer what kind of interest rates

Answer 11

lower rates, and lenders would prefer higher

Question 12

usury law

Answer 12

which puts a price ceiling on interest rates, it would cause a shortage in the market if the ceiling was below the equilibrium interest rate

Question 13

us loans interest rate is

Answer 13

2.25% and mortgage is 4%

Question 14

indirect crowding out

Answer 14

when an increase in government spending is financed through borrowing, private spending decreases due to the rising interest rates

Question 15

direct crowding out

Answer 15

when government spends, private markets spend less because their ability to spend is taxed away

Question 16

financial trades may create value because of differing abilities

Answer 16

one partner is motivation and sells a good, and the other partner is less motivated and buys the good. one partner finances while the other manages.

Question 17

leveraged buyout

Answer 17

where a firm borrows in order to purchase another firm then immediately sells the firm in whole or in parts

Question 18

finance moves money around , but it does so to more resources around from..

Answer 18

less valued uses to higher valued uses, resulting in an increase in the wealth of a nation and nearly always creating employment

Question 19

insolvent

Answer 19

a firm whose value is negative-owes more than it owns

Question 20

iliquid

Answer 20

a solvent firm may be forced to declare bankruptcy, because of this, cannot pay its immediate obligations

Question 21

absolute priority rule

Answer 21

which the creditors are ranked with regard to how long ago the company became indebted to them, then every penny is paid to the senior debt, before any less senior debt is paid.

Question 22

Fannie Mae (Federal National Mortgage Association)
and Freddie Mac (competeror)

Answer 22

was created to restart lending on housing after the crisis of housing prices from the great depression

Question 23

The system of Fannie Mae and Freddie Mac

Answer 23

1. Mortgage loans to poor people
2. bank sells loan to freddie or fannie
3. poor people make payments to them
4. FM sell investors a share of the payments
5. the money to buy more mortgages with is returned to them

Question 24

Community Reinvestment Act

Answer 24

became a law, which instructed banks to make loans to poor people, who could not get home loans before because the could not pay

Question 25

noncomforming loans

Answer 25

HUD directed the FMs to purchase loans that banks made to risky borrowers who could not meet the old standards.
-this passed the risk of making loans to poor people to the FM

Question 26

What was the result of the housing industry being over built?

Answer 26

• frannie and freddie failed and could not pay bondholders
• AIG failed as well
• state had to pay off debt to the bondholders

Question 27

TARP ( Trouble Asset Relief Program)

Answer 27

$700 billion was given to pay off bad mortgage back bonds. BUT Paulson took the money and gave it to banks. Banks were forced to accept the money

Question 28

Congress proposed remedy for the financial crises, the Dodd-Frank bill of 2010

Answer 28

created new government regulatory agencies
created new regulations
directed regulators to write additional regulations

Question 29

The Dodd-Frank bill does NOT

Answer 29

restrict the FMs in any way

Question 30

The Dodd-Frank Bill DOES

Answer 30

• Establish the Financial Stability Oversight Council
• Instituted Bailout Insurance
• Created the Consumer Financial Protection Bureau to Regulate consumer credit

Question 31

Systemic Risks

Answer 31

risks to the entire financial system

Question 32

Aftermath of the 2008 Crisis

Answer 32

brought together the value destruction that accompanies government insuring of loans and austrian businesses cycle theory on how fed money creation inflates bubbles. The bubble bursted

Question 33

economic growth

Answer 33

a healthy economy’s increased production of goods and services is atleast around 3% per year

Question 34

the 2008 crisis was triggered by

Answer 34

contraction of money supply, bad housing policies, monetary expansion to fight the recession