Introduction to Macroeconomics and Finance

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Questions and Answers

Which of the following statements about medium of exchange is true?

It increases the need for finding a double coincidence of wants.

It is often difficult to standardize.

It has a slow transaction process.

It promotes specialization in economic activities. (correct)

What does the term 'store of value' refer to?

A way to measure transactions in an economy.

Currency that focuses on high liquidity.

A method for quickly exchanging goods.

Assets that maintain purchasing power over time. (correct)

Which type of money is directly backed by a physical commodity?

E-money

Commodity money (correct)

Electronic payment

Fiat money

What is included in the M1 monetary aggregate?

Demand deposits Signup and view all the answers

What is a characteristic of fiat money?

It requires trust from the government. Signup and view all the answers

What does nominal GDP represent?

GDP calculated using current prices Signup and view all the answers

Which measure of inflation is a percentage increase in the price level?

GDP Deflator Signup and view all the answers

What is a bond?

A debt security promising periodic payments Signup and view all the answers

What is the primary role of financial intermediaries?

To channel funds from savers to borrowers Signup and view all the answers

What does fiscal policy primarily involve?

Government spending and taxation Signup and view all the answers

What aspect of financial markets enhances liquidity?

Secondary markets Signup and view all the answers

What does the term 'monetary policy' refer to?

Management of the money supply and interest rates Signup and view all the answers

What is the purpose of deposit insurance?

To prevent bank runs Signup and view all the answers

What is a characteristic of 'adverse selection' in finance?

The risk of selecting bad borrowers prior to lending Signup and view all the answers

Which is a function of equity markets?

To enable ownership claims on corporations Signup and view all the answers

Which of the following is true about money market instruments?

They are primarily for short-term financing Signup and view all the answers

What does the GDP Deflator measure?

Average price level of all goods produced Signup and view all the answers

What does risk sharing in finance typically involve?

Diversification of investments among various assets Signup and view all the answers

What is a key function of the central bank in relation to monetary policy?

Conducting open market operations Signup and view all the answers

Study Notes

Basic Macro Concepts

Nominal GDP is calculated using current prices.
Real GDP is calculated using constant prices, usually a benchmark year.
Inflation is the percentage increase in the price level of an economy, creating a difference between nominal and real measures.
Two measures of aggregate price levels are the GDP deflator and the Consumer Price Index (CPI).

Basic Financial Concepts

Financial markets transfer funds from those with excess funds to those needing them.
A security (financial instrument) is a claim on future income, like stocks and bonds.
A share (stock) is a claim on a corporation's residual earnings.
A bond is a debt security promising periodic payments.
Interest rate is the cost of borrowing or rental price of funds.

Financial Intermediation, Innovation, and Crises

Financial intermediaries borrow funds from savers and lend to borrowers.
Banks accept deposits and make loans.
Other financial institutions include insurance companies, finance companies, pension funds, and mutual funds.
Financial innovation creates new financial products, like ATMs, tele-banking, and online banking, often improving efficiency.
Collateralised Debt Obligations (CDOs) are an example of transferring risks.
Financial crises include sharp declines in asset prices and sudden failures of firms.

Fiscal Policy and Monetary Policy

Monetary policy manages the money supply and interest rates, conducted by central banks.
Fiscal policy involves government spending and taxation.

Structure of Financial Markets

Debt markets use bonds, mortgages, and loans.
Equity markets involve stocks and shares.
Primary markets underwrite securities, while secondary markets bring liquidity and price discovery.
Exchanges (e.g., NYSE, LSE) and OTC markets facilitate trading.
Money markets handle short-term instruments, while capital markets involve longer-term ones.

Function of Financial Intermediaries

Financial intermediaries lower transaction costs by acting as intermediaries.
They offer economies of scale and scope.
They also provide liquidity services.
Intermediaries reduce investor risk and deal with asymmetric information problems.

Money and its functions

Money is anything generally accepted as payment for goods or services, or debt repayment.
This includes currency (paper bills and coins) as one type of mone.
Wealth are assets that store value, while income is a flow of earnings.

Measuring Money

Monetary aggregates measure liquidity.
M1 includes currency, traveler's checks, demand deposits, and other checkable deposits.
M2 includes M1 plus small denomination time deposits, savings deposits, money market deposit accounts, and money market mutual fund shares.

Regulation of the Financial System

Regulations aim to reduce adverse selection and moral hazard problems.
They also monitor financial intermediaries, enforce regulations.

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Description

This quiz covers essential macroeconomic concepts such as GDP calculations, inflation, and price levels. Additionally, it delves into basic financial principles, including the role of financial markets and instruments like stocks and bonds. Test your understanding of these foundational topics in economics and finance.