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FIN 330 Exam 1

Terms in this set (59)

monetary policy
management of money supply and interest rates
fiscal policy
deals with government spending and taxation
5 core principles of money and banking
1. Time has value
2. Risk requires compensation
3. Information is the basis for decisions
4. Markets determine prices and allocate resources
5. Stability improves welfare
Surplus Units
Financial market participants who provide funds are called
Commercial banks face competition from a variety of institutions, including
mutual funds, investment banks, and insurance companies.
Securities are ________ for the person who buys them, but are ________ for the individual or firm that issues them.
Assets, Liabilities
Commercial Paper
A short-term debt instrument issued by well-known corporations is called
I suggested government-mandated forbearance put the most strain on which stakeholder?
Loan Servicer
The most liquid securities traded in the capital market are
Treasury Bonds
depository intermediaries
Banks and Credit Unions
Contractual intermediaries
Insurance and Pensions
Other Intermediaries
Mutual Funds, Finance Companies, Hedge Funds
Money
an asset that is generally accepted as payment for goods and services or repayment of debt.
Functions of Money
medium of exchange, unit of account, store of value
money supply (M1)
Currency (coins and paper money) in the hands of the public, Checkable deposits
Money supply (M2 money)
everything that's in M1 plus (1) savings deposits, (2) time deposits (accounts of less than $100,000) held in depository institutions and (3) money market mutual fund shares.
unit of account
a standard monetary unit of measurement of value/cost of goods, services, or assets.
store of value
An asset such as money or gold that is purchased or accepted as payment for goods and services for its ability to purchase other assets in the future without rapidly losing its purchasing power.
Medium of exchange
An intermediary used in trade to avoid the inconveniences of a pure barter system, such as money.
fiat money
money that has value because the government has ordered that it is an acceptable means to pay debts
Economists Definition of Money
I hope that I have enough money to buy my lunch today.
Rate of Return
The sum of the current yield and the rate of capital gain is called the
Default risk
The risk that interest payments will not be made, or that the face value of a bond is not repaid when a bond matures is
Bonds issued by the U.S. Treasury are referred to as benchmark bonds because:
they are highly liquid and virtually free of default risk.
The five C's of credit
Character (honesty, integrity, trustworthiness)
Capacity (success of business)
Capital (financial "safety net")
Collateral (pledged assets)
Conditions (economic & competitive environment)
Yield Curve
A plot of the interest rates on default-free government bonds with different terms to maturity is called
An inverted yield occurs when
long-term interest rates are lower than short-term interest rates.
The additional incentive that the purchaser of a Treasury security requires to buy a long-term security rather than a short-term security is called the
Term premium
Pure Expectations Theory
A theory that states that the shape of the yield curve depends on investors' expectations about future interest rates.
Segmented Markets Theory
a theory of term structure that sees the markets for different-maturity bonds as completely separated and segmented, so that the interest rate on bonds of a given maturity is determined solely by supply of and demand for bonds of that maturity
Liquidity Preference Theory
the theory that the shape of the term structure of interest rates is determined by an investor's additional required interest rate in compensation for additional risks
Preferred Habitat Theory
Investors have a preference for bonds of one maturity over another
They will be willing to buy bonds of different maturities only if they earn a somewhat higher expected return
Investors are likely to prefer short-term bonds over longer-term bonds
Change in quantity demanded/supplied
movement along the curve
change in supply/demand
shift of curve
As price of bonds decreases
quantity of demand increases
Loanable Funds Theory
suggests that the market interest rate is determined by the factors that control supply of and demand for loanable funds
If economic conditions become less favorable, then
there would be a decreased demand by business for loanable funds
The __________ sector is the largest supplier of loanable funds.
Household
The equilibrium rate
equates the aggregate demand for funds with the aggregate supply of loanable funds
If the economy weakens, there is ______ pressure on interest rates. If the Federal Reserve increases the money supply, there is ________ pressure on interest rates (assume that inflationary expectations are not affected).
downward; downward
When there are expectations of higher inflation in the future, we would typically expect the supply of loanable funds to ________ and the demand for loanable funds to ________.
Decrease; increase
In computing the net present value of a proposed project, the required rate of return to implement the project will be ________ if interest rates are _________.
Lower; lower
T / F All other characteristics being equal, securities with lower liquidity would have to offer a higher yield to be preferred.
True
In general, securities with ____ characteristics will offer ____ yields.
favorable; lower
If all other characteristics are similar, ___________ would have to offer ______________.
taxable securities; a higher before-tax yield than tax-exempt securities
The term structure of interest rates defines the relationship
maturity and yield
Assume the yield curve is flat. If investors flood the short-term market and avoid the long-term market, they may cause the yield curve to:
become upward sloping
The yield curve for corporate bonds
Typically has the same slope as the Treasury yield curve
T / F In general, securities with favorable characteristics will offer higher yields to entice investors.
True
AD = Consumption + Investment + Government Expenditures + (Exports - Imports)
C + I + G + (X − M) = AD
Keynes would say
demand creates supply
A decrease in aggregate demand would be caused by a(n) ________________ in __________________.
increase; imports
An increase in government spending ______________ aggregate ______________.
increases, demand
An increase in the cost of production _____________ aggregate ______________.
decreases; supply
Everything else held constant, aggregate demand increases when
companies plan to expand production lines
The long-run aggregate supply curve shifts to the right when there is
an increase in the total amount of capital in the economy, an increase in the available technology, a decrease in the natural rate of unemployment.
Aggregate demand curves slope down for each of the following reasons EXCEPT:
the wealth effect
Consumption can be sensitive to changes in the real interest rate because:
higher interest rates can increase the cost of durable goods like automobiles.
What is likely impact on aggregate expenditures from an increase in the real interest rate?
Decrease
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