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Economics 1022A/B Chapter Notes - Chapter 23: Real Interest Rate, Opportunity Cost, Nominal Interest Rate

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lemonherring294
3 Jan 2015
School
Western University
Department
Economics
Course
Economics 1022A/B
Professor
Jeannie Gillmore

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ECON 1022A/B Full Course Notes
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ECON 1022A/B Full Course Notes
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Document Summary

The funds that firms use to buy physical capital are called financial capital: the key canadian financial institutions are banks, trust and loan companies, credit unions and caisses populaires, pension funds, and insurance companies. A surplus of funds lowers the real interest rate and a shortage of funds raises the real interest rate. The figure to the right shows that an increase in the demand for loanable funds with no change in supply raises the real interest rate and increases the equilibrium quantity of loanable funds. The figure to the left shows that an increase in the supply of loanable funds with no change in demand lowers the real interest rate and increases the equilibrium quantity of loanable funds. The figure to the left shows the market for loanable funds when the government has a budget surplus of billion. The government budget surplus is added to private saving (pslf) to determine the supply of loanable funds (slf).

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Related Questions

1-Principal __________________ fall into three categories: depository institutions (banks), contractual savings institutions, and investment intermediaries.

Financial markets security exchanges financial intermediaries’ investment funds

Savings institutions

bitcoin/annuity payments securities/investment advice

2-Deposits that are payable on demand but do not allow their owner to write checks are called _______________.

Restricted deposits savings deposits time sensitive deposits non-checkable deposits demand deposits

3-Deposit with fixed terms to maturity are called ___________.

Relative deposits term deposits fixed deposits restricted deposits time deposits

4-Commercial banks ___________ primarily by issuing checking deposits, savings accounts, and time deposits.

Increase profits decrease cost attract investors raise funds increase assets

5-A type of depository institution that over time has become more like commercial banks and are now more competitive with each other are called ______________ associations and mutual savings banks.

savings and loan contractual savings institutions, investment intermediaries

crowd funding sites deposit and loan

6-Credit unions are typically very small cooperative lending institutions organized around a particular _____________________: members of the same union, employees of a particular firm, and members of the same profession, such as teachers.

Type of investment corporation financial strategy risk avoidance strategy

group that have something in common

7-Insurance companies and pension funds are examples of ________________ institutions.

contractual savings depository institutions (banks), investment intermediaries entrepreneurial at risk

8-Contractual savings institutions (CSI’s) acquire funds at _______________ on a contractual basis.

Estate sales periodic intervals bankruptcy auctions liquidations initial offerings

9-CSI’s do not worry as much as banks about losing funds quickly because they can predict with reasonable accuracy how much they will have to pay out in ___________ in coming years.

Interest payments dividends bank notes benefits IOU’s

10-_______________ is not as important a consideration for CSI’s as it is for banks.

Types of customers adverse selection Liquidity of assets portfolio diversification liabilities

11-CSI investments are typically ____________ such as corporate bonds, stocks, and mortgages.

Short-term securities long-term securities 3-month term securities overnight securities short-term assets

12-Companies that insure people against financial hazards following a death and sell annuities are called ________________________.

Predatory companies over-the-counter companies risky companies life insurance companies depository companies

13-_________________ that people pay to keep their policies in force constitute the funds life insurance companies use to buy corporate bonds and mortgages.

Interest dividends installments late fees Premiums

14-Companies that ___________ their policyholders against loss from theft, fire, and accidents are called fire and casualty insurance companies.

Insure Hold harmless guarantee advise oversee

15-Fire and casualty insurance companies acquire funds through the _________________ for their policies.

Sale of stock liquidation of collection of premiums interest payments dividends

16-Because of the greater possibility of loss of funds if major disasters occur, fire and casualty companies buy more ________________ than life insurance companies do.

Comprehensive insurance liquid assets risky assets corporate insurance bankruptcy insurance

17-Private pension funds and state and local retirement funds provide _______________ in the form of annuities to employees who are covered by a pension plan.

Dividends revenue stock options retirement income loans

18-Pension funds acquire funds from _____________ from employers and employees.

Fees pledges contributions garnishments payroll deductions

19-The largest ______________ of pension funds are corporate bonds and stocks.

Liability holdings asset holdings interest payments dividend payments fees

20-_________________________ include; finance companies, mutual funds and money market mutual funds.

depository institutions (banks), contractual savings institutions, stock markets

bond markets Investment intermediaries

21-Finance companies raise funds by ___________ commercial paper and by ____________ stocks and bonds.

Issuing/selling selling/buying selling/ issuing buying/issuing discounting/shorting

22-Finance companies lend these funds to __________, who make purchases of such items as furniture, automobiles, and home improvements, and to small businesses.

-depository institutions (banks), consumers contractual savings institutions,

investment intermediaries corporations

23-It is common for a finance company to be organized by a parent corporation to help _______________, such as; ford motor credit company.

Diversify its portfolio acquire assets liquidate liabilities sell its product off set profits

24-Selling shares to many individuals and using the proceeds to purchase diversified portfolios of stocks and bonds describes how _______________ acquire funds.

depository institutions (banks), mutual funds contractual savings institutions

stock markets bond markets

25-Shareholders can sell shares at any time but shares are subject to value fluctuations therefore mutual fund investments can be _______.

risky Subject to high returns certain investments interest rate neutral misunderstood

26-Money market funds sell _______ like mutual funds and offer checking accounts like ___________.

Deposits/insurance companies bonds/banks shares/insurance companies

Shares/ banks stock options/crowd sourcing sites

27-Money market funds invest in ________ and very ____________ and interest on these assets is paid out to the shareholders.

High risk/non-liquid junk bonds/risky assets low risk/ liquid assets low risk/junk bonds sub-prime securities/liquid assets

28-Money market funds have experienced extraordinary growth primarily because people like the idea of having a checking account that ____________________.

Has no fees pays them interest offers overdraft protection pays dividends

always has money in it

29-Investment banks help a ______________ issue securities.

Person foreign country stock market corporation bond market

30-Investment banks advises the corporation on which type of ______________ to issue; stocks or bonds.

Insurance loans interest rates dividends products securities

31-Investment banks help sell the corporations securities by purchasing them from the corporation and _______ them in the market.

Discounting re-selling insuring advertising financing

32-Investment banks also act as ___________ and earn enormous fees by helping corporations acquire other companies through mergers or acquisitions.

Depositories money launders deal makers insurance companies entrepreneurs

6. If there is a shortage of loanable funds, then

a.

the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is above equilibrium.

b.

the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is below equilibrium.

c.

the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is above equilibrium.

d.

the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is below equilibrium.

 

7. We associate the term debt finance with

a.

the bond market and we associate the term equity finance with the stock market.

b.

the stock market and we associate the term equity finance with the bond market.

c.

financial intermediaries and we associate the term equity finance with financial markets.

d.

financial markets and we associate the term equity finance with financial intermediaries.

8. If the demand for loanable funds shifts to the right, then the equilibrium interest rate

a.

and the quantity of loanable funds rises.

b.

and the quantity of loanable funds falls.

c.

rises and the quantity of loanable funds falls.

d.

falls and the quantity of loanable funds rises.

 

9. Long-term bonds are

a.

riskier than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds.

b.

riskier than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.

c.

less risky than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds.

d.

less risky than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.

10. Compared to bondholders, stockholders

a.

face higher risk and have the potential for higher returns.

b.

face higher risk but receive a fixed payment.

c.

face lower risk and have the potential for higher returns.

d.

face lower risk but receive a fixed payment.

11. The old adage, 'don't put all your eggs in one basket',€ is very similar to a modern bit of advice concerning financial matters:

a.

Buy low-risk bonds.

b.

Use a medium of exchange.

c.

Diversify.

d.

Intermediate.


12. A budget surplus is created if

a.

the government sells more bonds than it buys back.

b.

the government spends more than it receives in tax revenue.

c.

private saving is greater than zero.

d.

None of the above is correct.

13. Fred is considering expanding his dress shop. If interest rates rise he is

a.

less likely to expand. This illustrates why the supply of loanable funds slopes downward.

b.

more likely to expand. This illustrates why the supply of loanable funds slopes upward.

c.

less likely to expand. This illustrates why the demand for loanable funds slopes downward.

d.

more likely to expand. This illustrates why the demand for loanable funds slopes upward.

14. You are thinking of buying a bond from Knight Corporation. You know that this bond is long term and you know that Knight's business ventures are risky and uncertain. You then consider another bond with a shorter term to maturity issued by a company with good prospects and an established reputation. Which of the following is correct?

a.

The longer-term would tend to make the interest rate on the bond issued by Knight higher, while the higher risk would tend to make the interest rate lower.

b.

The longer-term would tend to make the interest rate on the bond issued by Knight lower, while the higher risk would tend to make the interest rate higher.

c.

Both the long-term and the higher risk would tend to make the interest rate lower on the bond issued by Knight.

d.

Both the long-term and the higher risk would tend to make the interest rate higher on the bond issued by Knight.

15. In an imaginary economy, consumers buy only sandwiches and magazines. The fixed basket consists of 20 sandwiches and 30 magazines. In 2006, a sandwich cost $4 and a magazine cost $2. In 2007, a sandwich cost $5. The base year is 2006. If the inflation rate in 2007 was 16 percent, then how much did a magazine cost in 2007?

a.

$1.87

b.

$2.08

c.

$2.32

d.

$3.00

16. An increase in the price of Irish whiskey regularly purchased by Americans will be reflected in

a.

both the U.S. GDP deflator and the U.S. CPI.

b.

neither the U.S. GDP deflator nor the U.S. CPI.

c.

the U.S. GDP deflator, but not the U.S. CPI.

d.

the U.S. CPI, but not the U.S. GDP deflator.

 

17. Which of the following would be human capital and physical capital, respectively?

a.

for an accounting firm, the accountants' knowledge of tax laws and the number of hours worked by those accountants

b.

for a grocery store, grocery carts, and cash registers.

c.

for a restaurant, the chefs' knowledge about preparing food and equipment in the kitchen

d.

for a library, the building, and the reference librarians' knowledge of the Internet

18. If a production function has increasing returns to scale, the output can be more than doubled if

a.

labor alone doubles.

b.

all inputs but labor double.

c.

all of the inputs double.

d.

None of the above is correct.

19.Suppose that an American company opens and operates a restaurant in Ireland. This is an example of

a. foreign direct investment. American saving is used to finance Irish investment.

b. foreign direct investment. American saving is used to finance American investment.

c. foreign portfolio investment. American saving is used to finance Irish investment.

d. foreign portfolio investment. American saving is used to finance American investment.