ECO 301 Lecture Notes - Lecture 2: Adverse Selection, Eurocurrency, Moral Hazard

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7 Sep 2016

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Markets in which funds are transferred from people/firms with an excess of funds to people who have a need for funds. Have a direct effect on: individual wealth, behavior of business, efficiency of our economy. If financial markets are performing well effieciecy and individual wealth will increase because business is growing. 3 main financial markets: bond market, determines interest rates, cost of borrowing/lending money, stock market a. Investment/retirement decisions: foreign exchange market, affect imports/exports, where foreign currency is exchanged, has the power to affect other markets as well c. i. Ex unfavorable exchange rates of currency could affect decisions on whether money is invested in foreign securities. Channel funds from people who may not be using them to be productive to those who would but cannot. Money plays an important role in generating the business cycle. Recession (high unemployment) and expansion (low unemployment) affect us all. Borrowers borrow directly from lenders in financial markets by selling them securities.

Related Questions

1. The market in which loans are bought and sold is called the:

		loan market.
		money market.
		secondary loan market.
		primary loan market.

2. Which of the following is omitted in a barter transaction?

		trade
		medium of exchange
		store of value
		money

3. If Bill performs plumbing upgrades for Alice in exchange for her incorporating his business, then their _________________________ will be satisfied.

		balance of trade
		double coincidence of wants
		convenience of exchange
		division of labour

4. If loans become far less available, then sectors of the economy that ______________ like business investment, home construction, and car manufacturing can be dealt a crushing blow.

		depend on borrowed money
		typically generate extraordinary gains
		make loans to financial capital markets
		failed to diversify risk

5. Stealth bank has deposits of $600 million. It holds reserves of $30 million and government bonds worth $80 million. If the bank sells its loans at the market value of $400 million, what will its total assets equal?

		$110 million
		$710 million
		$480 million
		$510 million

6. Lance paid $175,000 for his house in 2003 and sold it for $325,000 in 2006. What function did the house serve during the time Lance owned it?

		medium of exchange
		unit of account
		store of value
		unit of exchange

7.Which of the following terms is considered to be a narrow definition of the money supply that includes, among other things, currency?

		savings
		money
		M2
		M1

8. Which of the following institutions determines the quantity of money in the economy as its most important task?

		U.S. Department of the Treasury
		Federal Open Market Committee
		Central Bank
		Federal Reserve Board of Governors

9. How are the specific interest rates for the lending and borrowing markets determined?

		U.S. Treasury Department Board policy
		by the forces of supply and demand
		through open market operations
		by altering the discount rate

10.When the central bank lowers the reserve requirement on deposits:

		the money supply increases and interest rates decrease.
		the money supply and interest rates decrease.
		the money supply and interest rates increase.
		the money supply decreases and interest rates increase.

taupeant891

51.The Fed is conducting expansionary monetary policy if it:

A increases the discount rate, buys bonds, and sets a lower target for the federal funds rate.

B decreases the discount rate and sells bonds.

C sets a lower target for the federal funds rate and buys bonds in the open market.

D increases reserve requirements and buys bonds in the open market.

E buys bonds in the open market and raises the discount rate.

52.If banks become concerned about future conditions and decide to hold larger excess reserves, which of the following is a likely result?

A A rise in interest rates

B An increase in bond prices

C An increase in aggregate demand

D An increase in the money supply

E Both C and D

53.The Fed is under no obligation to coordinate its actions with fiscal policy. And in fact, the Fed may take actions specifically designed to counteract some piece of fiscal policy. An example of fiscal and monetary policies with opposite effects is:

A an increase in taxes and increased sales of bonds by the Fed.

B a decrease in government spending and an increase in the discount rate.

C a decrease in taxes and a decrease in the target for the federal funds rate.

D an increase in government spending and an increase in reserve requirements.

E a decrease in taxes and increased purchases of bonds by the Fed.

54.In the fictitious nation of Zagora, a worker can produce either 5 books or 10 televisions in an hour. In neighboring Plovdiv, a worker can produce either 3 books or 5 televisions in an hour. Which statement about this situation is true?

A Zagora has comparative advantage in the production of books.

B Zagora has comparative advantage in the production of televisions.

C Workers in Plovdiv canât possibly compete against the super-productive workers in Zagora.

D Workers in Zagora canât be expected to compete against the low-wage workers in Plovdiv.

E None of the above

55.Given the U.S. has a current account deficit, a large increase in the demand for U.S. computer programs among Japanese residents will have all the following effects except:

A an increase in the exchange rate, expressed in yen per dollar.

B an increase in the U.S. capital account surplus.

C an increase in investment in Japan.

D an decrease in the U.S. trade deficit.

E It may have all the above effects.

56.Fiscal policy affects exchange rates because:

A as government spending increases, the government must buy more and more goods and services from foreign countries.

B as government debt increases, interest rates rise, and the value of the currency rises.

C as government debt increases, interest rates rise, and the value of the currency falls.

D as the money supply increases, interest rates fall, and the value of the currency rises.

E as the money supply increases, interest rates fall, and the value of the currency falls.

57.There are many kinds of trade restrictions, and trade restrictions are put into place for many reasons. Which of the following is not a reason to use trade restrictions?

A To save natural habitats from over-use

B To protect the jobs of workers in certain industries

C To make a political statement regarding the labor policies of another nation

D To compensate for higher taxes placed on domestic producers

E To create a lower prices for domestic consumers

58.If the value of the U.S. dollar in foreign exchange markets rises:

A U.S. exports will become relatively less expensive.

B capital inflows into the United States will increase.

C people in the U.S. will purchase fewer imports.

D U.S. exports will likely decrease.

E All of the above

59.Saying that leakages equal injections give the equation:

A T + S + X = G + I + M

B Y = C + S + T

C Y = C + I + G + X - M

D T + S + M = C + G + I + X

E T + S + M = G + I + X

harlequinleopard136

Question 32

Tim, a citizen of the United States living in Virginia, buys a computer that was made in South Korea by a Japanese firm. This transaction would affect the GDP of the United States in which way?

		Net exports would decrease and GDP would decrease.
		Net exports would decrease and GDP would be unaffected.
		Net exports would increase and GDP would increase.
		Net exports would increase and consumption would increase.

1 points

Question 33

An increase in U.S. government spending tends to

		increase U.S. interest rates and increase the U.S. capital account surplus.
		increase U.S. interest rates and decrease the U.S. capital account surplus.
		decrease U.S. interest rates and increase the U.S. capital account surplus.
		decrease U.S. interest rates and decrease the U.S. capital account surplus.

1 points

Question 34

A _______ is a system in which the government intervenes extensively in the foreign exchange market to keep the exchange rate within certain bounds.

dirty float

floating exchange rate

fixed exchange rate

dollarization

1 points

Question 35

Suppose the exchange rate between the euro and the dollar is E0.5 to $1. If a Big Mac costs $3 in the United States and E1.5 in Germany, then the real exchange rate is

1:1.

2:1.

1:2.

It cannot be determined from this information.

1 points

Question 36

Which of the following prevent the purchasing power parity theorem from holding perfectly?

transportation costs

goods that cannot be shipped

tariffs and quotas

Each of these answers is correct.

1 points

Question 37

Fiscal policy is more effective in affecting economic activity if

		many resources are unemployed.
		there is a real shock instead of an aggregate demand shock.
		the economy returns to the long-run condition almost immediately.
		there is a long implementation lag.

1 points

Question 38

In a typical year, changes in government spending compared to overall spending are relatively

small.

large.

unpredictable.

well-timed.

1 points

Question 39

Which statement is TRUE about the difference between monetary and fiscal policy?

		Fiscal policy can quickly adjust to changes in aggregate demand.
		Fiscal policy can have a more direct impact.
		Monetary policy is subject to many long lags.
		Monetary policy can affect the economy regardless of the actions banks take.

1 points

Question 40

Fiscal policies that help an economy in a recession without additional actions by policy makers are called

consumption smoothers.

Ricardian equalizers.

automatic stabilizers.

Each of these answers is correct.

1 points

Question 41

The U.S. individual income tax system can best be described as a

regressive tax system.

flat tax system.

zero tax system.

progressive tax system.

1 points

Question 42

What demographic change in the United States will cause government spending to increase in the next 50 years?

The population over 65 will grow.

The population will be younger.

Women will have fewer children.

Immigration will increase.

1 points

Question 43

What kind of rising costs will mostly cause U.S. government spending to skyrocket in the future?

defense

environmental protection

education

health care

1 points

Question 47

The Fed could have popped the bubble of the housing boom in the 2000s by

lending directly to homeowners.

regulating the stock markets more.

reducing the growth rate of the money supply.

doing nothing.

1 points

Question 48

Which of the following would be an example of running monetary policy by rules?

A 5 percent increase in money supply automatically leads to a 2 percent increase in real GDP.

An increase in money supply automatically leads to an increase in inflation.

The Fed will increase money growth to different levels, depending on the severity of the recession.

A 1 percent drop in real GDP will automatically elicit a 2 percent increase in money supply.

Question 50

Moral hazard occurs when

		the failure of one financial institution can bring down other institutions as well.
		financial institutions take on too much risk because they are insured.
		financial institutions become insolvent because they issued too many loans.
		there are more short-term liabilities than short-term assets.

Which of the following is NOT a transmission mechanism?

reductions in the money supply

intertemporal substitution

uncertainty

sticky wages and prices

Question 56

For a given increase in government spending growth, intertemporal substitution is more widespread when

		the impact of AD growth on both inflation and real GDP growth is stronger.
		the impact of AD growth on both inflation and real GDP growth is weaker.
		the impact of AD growth on inflation is stronger and the impact of the AD growth on real GDP growth is weaker.
		the impact of AD growth on inflation is weaker and the impact of AD growth on real GDP growth is stronger.

Stalin:

		instituted democratic reforms, leading to widespread prosperity.
		took government control of the farms in Ukraine, leading to the starvation of millions of people.
		increased the provision of public goods, which had a positive effect on lowering the unemployment rate.
		tried unsuccessfully to expand voting rights in 1924 Russia.

1 points

Question 60

1 points

Question 59

If voters care about two issues such as taxes and war, then politicians:

		will form a stable policy on these issues.
		can pose a policy that will never lose against another policy.
		must assume that there is no median voter.
		may never converge on a stable outcome.

1 points

Question 58

Policy A adversely affects 50 million people at a cost of $1 per person. But Policy A also benefits 1,000 people at $30,000 per person. Which of the following statements is true?

		Policy A will not become law because it hurts more people than it helps.
		Policy A concentrates all the costs among a small group of people and all the benefits among a large group of people.
		Policy A is likely to be supported by politicians even though it makes society worse off.
		Since Policy A negatively affects many people, and so rational ignorance will not be a problem.

1 points

Question 57

Data for the United States show that the incumbent party tends to win the election if:
I. personal disposable income is growing.
II. the inflation rate is low.
III. the political party has not been in power for too many continuous terms.

		I only
		I and II only
		I and III only
		I, II, and III

1 points

Question 53

1 points

Question 52

What is the purpose of the Fed's structure?

		to give the President of the United States as many tools as possible to regulate the economy
		to make sure all states are given equal access to monetary policy decisions
		to keep the private sector out of the monetary policy making arena
		to keep the power of the Fed dispersed

1 points

Question 51

An increase in money growth will cause inflation to increase in

		the short run only.
		the long run only.
		both the short run and the long run.
		neither the short run nor the long run.

ECO 301 Lecture Notes - Lecture 2: Adverse Selection, Eurocurrency, Moral Hazard

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Related Questions

		dirty float
		floating exchange rate
		fixed exchange rate
		dollarization

		transportation costs
		goods that cannot be shipped
		tariffs and quotas
		Each of these answers is correct.

		consumption smoothers.
		Ricardian equalizers.
		automatic stabilizers.
		Each of these answers is correct.

		regressive tax system.
		flat tax system.
		zero tax system.
		progressive tax system.

		The population over 65 will grow.
		The population will be younger.
		Women will have fewer children.
		Immigration will increase.

		lending directly to homeowners.
		regulating the stock markets more.
		reducing the growth rate of the money supply.
		doing nothing.

		1:1.
		2:1.
		1:2.
		It cannot be determined from this information.

		small.
		large.
		unpredictable.
		well-timed.

		defense
		environmental protection
		education
		health care