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Current Economic Issues > Financial Crises Typology > Flashcards

Financial Crises Typology Flashcards

(50 cards)

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1
Q

What is Barter

A

The exchange of goods and services for other goods and services

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2
Q

Who understood the benefits of specialisation and thus barter over self sufficiency

A

Adam Smith

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3
Q

What are the positives of exchanging g +S

A

Boosts productivity, output and welfare

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4
Q

What is the main disadvantage of Barter

A
  • Requires a double coincidence of wants
  • Both parties have to have what the other one wants and be willing to exchange with each other
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5
Q

What else does barter require

A

The establishment of many prices

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6
Q

What is the solution to the establishment of many prices under barter system

A

Establish a generally accepted commodity as a medium of exchnage and unit of account

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7
Q

What does monetary exchange require

A

The seller of the good needs only to find someone who is willing to buy it and has the medium of exchange

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8
Q

What do we call paper money

A

Fiat currency

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9
Q

(Direct Finance) How did the system of credit aid in natural disasters in ancient societies

A
  • Fortunate households would lend their surplus to those negatively affected
  • Expectations was that households that benefitted would reciprocate if the roles were reversed
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10
Q

What does David Graeber argue about the development of credit

A

It was developed much earlier than money

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11
Q

In stock markets what are traded

A

Corporate ownership shares

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12
Q

What is a share holder entitled to

A

A proportional share of the profits and losses of the issuing firm

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13
Q

What do firms do in bond markets

A

Firms borrow funds by promising to pay back the amount borrowed plus some interest rate charges

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14
Q

What do you call the obligations of a bond

A

Debt contracts

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15
Q

What separates direct from inderect finance

A
  • Indirect is through financial intermediaries such as banks
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16
Q

Who uses direct finance and who uses indirect finance

A
  • Direct- larger firms with bigger reputation
  • Indirect- small firms that need to borrow but lack credentials
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17
Q

What do banks offer to households and firms

A
  • Deposits for those who wish to postpone spending
  • Loans for those who wish to spend but don’t have funds
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18
Q

What does a bank sheet show

A

Assets and liabilities

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19
Q

What is equity

A

What is owed to the owners

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20
Q

If equity is positive what does this mean

A

The bank is solvent

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21
Q

What does autarky mean

Study These Flashcards
A

An economy that is self sufficient

22
Q

How does David Ricardo demonstrate the benefits of international trade rather than autarky

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A
  • His theory of comparative advantage shows the benefits of specialisation through intl trade
23
Q

How does trade also enhance borrowing and lending opportunities

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A

By allowing capital to flow across national borders

24
Q

How is the exchange rate determined

Study These Flashcards
A

By the supply and demand mechanism

25
What are prices used for in decentralised markets
- As signals of economic activity Eg increase in some price could indicate stronger demand
26
What is the book value of each share equal to
Equity/ shares
27
When a firm makes profits, what happens to the balance sheet if they distribute these profits as dividends
The balance sheet will be the same
28
If a firm does not distribute profits as dividends
Equity increases and thus the book value of shares increases
29
Provide a simple demomstration of the efficient markets hypothesis
- When investors fully anticipate profits of eg in 2017, competition will ensure that the market price immediately adjusts on January 1
30
What is the bottomline of the Efficient market hypothesis
- Prices provide a forecast for profits
31
What is the simple statistical model that captures the main idea behind the efficient markets hypothesis
The random walk model
32
What is the random walk model
- With errors (E) that are indepedently distributed across time that follow a normal distribution with a mean of zero - Thus errors are random
33
According to the random walk model what is the best predictor of tomorrow's price
Today's price
34
What is Robert Shiller's critique of stock market efficiency
- Shiller showed that the present value of real dividends follows a relatively smooth stable trend from 1871 onwards whereas actual stock price fluctuate a lot more - This suggests prices are too volatile to be consistent with EMH, they overreact to information
35
How can you measure risk
Using the leverage ratio which is Liabilities/Equity
36
What does a high leverage ratio mean
A small decline in a firm/ banks' assets would be sufficient fo them to declare bankruptcy, eg it was 5% for RBS in 2008
37
Explain the risk of illiquidity for a bank
If all depositors start demanding to withdraw funds from demand deposits, the bank might not have enough reserves to meet this demand
38
How is it a coordination game during a bank run
- If everyone decides to withdraw deposits, you should to - If everyone decides to stay, you should stay too
39
How can bank runs be self fulfilling prophecy
Rumours that a bank might be in risk of going insolvent can lead to a bank run which in turn can itself cause the bank to become insolvent
40
Difference between illiquidity and insolvency
Illiquidity is a timing problem and more short term whereas insolvency is a long term financial health problem for bank
41
How can a liquidity problem cause a bank to go insolvent
- If a bank needs to liquidate, it will need to sell its assets to households and firms - There is assymetry in info thus the bank might have to sell asset prices below their book value
42
What can banks do when they need more liquidity and what does it create
They can borrow funds from other banks which creates a complex interbank network
43
Explain how contagion occurs (4)
- Bank becomes insolvent, equity is negative - Cannot fulfil all its obligations to its creditors which could also impact solvency of other banks - When financial system is in trouble and too many banks are liquidated, there are fewer buyers willing to purchase their assets - This drives down asset prices (fire sales) causing problems to other banks and thus boosting size of systemic losses
44
Why historically have countries chosen to peg their currency
- For Reduction in exchange rate uncertainty and gaining credibility
45
What does the central bank have to do when demand for the currency is weak in order to support the peg
- Use its international reserves to buy it in the foreign exchange market
46
As a trader, what does your payoff depend on if you are holding Baht and deciding whether to sell or not
- If everyone decides to hold you should hold too - If everyone decides to sell you should sell too
47
What are twin crises
Combinations of banking and currency crises
48
Why should you sell your currency if everyone else does
It will force the central bank to abandon the peg and you will make a profit by converting $ back to Baht
49
Explain maturity mismatch
- Banks usually borrow short-term but lend long term - Can lead to liquidity problems if, for example foreign lenders decide to stop providing loans
50
Explain currency mismatch
- Countries banks also borrow in foreign currencies while they lend in the domestic currency - Banks might have to liquidate their assets to meet demand by foreign creditors- converting the proceeds into the foreign currency might not be sufficient

Current Economic Issues (5 decks)

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