Money and Banking - Test 1

Money

Money

Anything generally accepted in payment for goods and services or to pay off debts.

Financial Intermediation

Facilitates exchange and promotes economic activity by channeling funds from savers to borrowers.

Financial Markets

Affect employment

Stocks

Financial securities representing partial ownership of a corporation.

Dividends

Payments made by a corporation to its shareholders from profits.

Bonds

Financial securities representing a promise to repay a fixed amount of money.

Interest Rate

Cost of borrowing funds

Securitized Loan

Collection of loans packaged together that pays interest to the owner.

Foreign Exchange

Unit of foreign currency.

Indirect Finance

Funds flow from lenders to borrowers through financial intermediaries.

Direct Finance

Funds flow directly from savers to borrowers.

Federal Reserve

Central bank of the United States

Monetary Policy

Actions managing money supply and interest rates to pursue macroeconomic objectives.

Risk Sharing

Spreading wealth among different assets to reduce risk.

Liquidity

Ease of exchanging an asset for money.

Information

Facts about borrowers and expectations of returns on financial assets.

Barter

System of direct exchange of goods and services without using money.

Commodity Money

Good used as money with intrinsic value.

Fiat Money

Money with no intrinsic value

Payments System

Mechanism for conducting transactions in the economy.

Checks

Promises to pay money deposited with a bank.

Legal Tender

Government designation that currency is accepted for taxes and debts.

M1

Narrow definition of money supply: currency in circulation and checking account deposits.

M2

Broader definition of money supply: includes assets in M1 such as savings accounts.

Risk

As soon as you let go of your money

Circulation of Money

Important for the economy to grow and create more opportunities for people.

Financial System

Moves money from savers to borrowers.

Interest Rate

Payment to savers for bearing risk; the cost of borrowing money.

Future Value

Amount of money earned over time starting with an initial investment.

Present Value

Value today of money to be received in the future.

Compound Interest

Interest on interest that compounds over time.

Discount Bond

Bond with no coupon payment

Face Value

Price that the issuer pays at the time of maturity.

Inflation Rate

General rise in the price level of an economy over time.

Nominal Interest Rate

Posted, observed, market rates representing the amount of money paid back.

Real Interest Rate

Nominal rate adjusted for inflation, representing the value of money paid back.

A stock

is a financial security that represents partial ownership of a firm.

A bond

is a financial security issued by a corporation or government to borrow money in exchange for the rights to an interest payment.

Foreign exchange

is a unit of foreign currency.

A securitized loan

is a collection of loans packaged together that pays an interest payment to the owner of the loan.

direct

…… finance is a transaction between two parties where one party lends directly to the other​ party

indirect

…. finance involves three​ parties: the​ borrower, the​ lender, and a third party - such as a bank.

Which involves financial​ intermediaries, and which involves financial​ markets?

Direct finance requires financial​ markets, while indirect finance involves financial intermediaries.

Describe key services that the financial system provides to savers.

Liquidity

Economies of scale of information

Risk sharing

What are the four main functions of​ money?

medium of exchange, unit of account, store of value, standard of deferred payment

medium of exchange

is something that is generally accepted as payment for goods and services.

unit of account

is a way of measuring value in an economy in terms of money.

store of value

is the accumulation of wealth by holding dollars or other assets that can be used to buy goods and services in the future.

standard of deferred payment

is a characteristic of money by which it facilitates exchange over time.

The problem of a double coincidence of wants refers to

the necessity in a barter system of each trading partner wanting what the other has to trade.

Commodity money can best be described as

a good used as money that also has value independent of its use as money.

An asset is

a thing of value that can be owned.

Fiat money

is money that would have no value if it were not usable as money.

In comparing money to shares of Apple​ stock, we can say that

both money and shares of Apple stock are stores of value.

In what sense do self−fulfilling expectations determine the acceptability of a medium of​ exchange?

People value something as money only if they believe others will accept it from them as payment.

Which of the following is an example of a commodity​ money?

gold coins

The financial system is primarily a means by which

funds are transferred from savers to borrowers.

Which of the following is NOT a financial​ asset?

Wells Fargo Bank

The purpose of diversification is to

reduce risk.

Liquidity

is the ease with which an asset can be exchanged for money.

In the United​ States, monetary policy is carried out by

the Federal Reserve System.

Which of the following assets is the least​ liquid?

house

Economists define money as

anything that people are willing to accept in payment for goods and services or to pay off debts.

The main role of financial intermediaries is to

borrow funds from savers and lend them to borrowers.

The relationship between the price of a financial asset and the payments an investor receives from owning the asset is given by the​ _______ formula.

present value

Compounding refers to

the process of earning interest on the principal of an investment and on the interest earned.

The price of a financial asset equals the

present value of all future payments.

A discount bond resembles a simple loan in that

the borrower repays in a single payment.

A discount bond involves

payment by the borrower to the lender of the face value of the loan at maturity.

The amount of funds the borrower receives from the lender with a simple loan is called the

principal.

When prices​ rise, the purchasing power of money

falls

Which of the following is NOT included in M1​?

savings account deposits

The narrowest money measure is

currency plus all checking accounts.

Money market mutual fund shares are included in

only M2

In​ Sweden, cash accounts for​ ________ of transactions.

about 2%

Checks are

promises to​ pay, on​ demand, money deposited with a financial institution.

Why​ aren't credit cards included in M1 or​ M2?

Credit is not a form of​ money, since it is a debt that is owed to the issuer of the card.

What is commodity​ money?

A good used as money that has value independent of its use as money

How does commodity money differ from fiat​ money?

Commodity money has value beyond its use as​ currency, while fiat money has no intrinsic value.

Which of the following is an example of fiat​ money?

A Federal Reserve Note used as money in the twenty−first century United States.

Which of the following is an example of a commodity​ money?

gold coins

The risk structure of interest rates is

the relationship among interest rates of different bonds with the same maturity.

Junk​ bonds, bonds with a low bond​ rating, are also known as

high-yield bonds.

Bonds with relatively low risk of default are called​ ________ securities and have a rating of Baa​ (or BBB) and​ above; bonds with ratings below Baa​ (or BBB) have a higher default risk and are called​ ________.

investment​ grade; junk bonds

A plot of the interest rates on default−free government bonds with different terms to maturity is called

a yield curve.

U.S. Treasury securities

are considered default−risk−free instruments.

Bond ratings

are published by private bond−rating agencies.

Which of the following is the highest bond rating assigned by​ Moody's Investors​ Service?

Aaa

Which of the following is a single statistic that summarizes a rating​ agency's view of the​ issuer's likely ability to make the required payments on its​ bonds?

bond rating

Bonds receiving one of the top four ratings are​ considered:

investment grade

Which of the following is the highest bond rating assigned by​ Moody's Investors​ Service?

Aaa

When a company whose ability to repay its obligations in full is​ uncertain,

it must offer investors higher yields to compensate them for the risk they take in buying their bonds or making loans.

According to the liquidity premium​ theory,

investors prefer shorter to longer maturities.

Which interest rate is typically the​ lowest?

3-month Treasury bills

Under the expectations​ theory, if market participants expect that future​ short-term rates will be higher than current​ short-term rates, the yield curve will

slope upward

The term structure of interest rates

represents the relationship among the interest rates on bonds that are otherwise similar but that have different maturities.

When the yield curve is downward−​sloping,

short−term yields are higher than long−term yields.

The expectations theory suggests that

the slope of the yield curve depends on the expected future path of short−term rates.

What is the difference between the nominal interest rate on a loan and the real interest​ rate?

Nominal interest rates do not adjust for​ inflation; real interest rates adjust for inflation.

The expected real interest rate approximately equals

the nominal interest rate minus the expected rate of inflation.