1What is investment closely associated with?
Using funds to acquire financial assets or productive assets
2What is saving closely associated with?
Putting funds into accounts or financial assets rather than consuming them
3What does the financial sector include?
The banking system and financial markets
4What does the financial sector facilitate?
Trade, specialization, saving, and investment
5What market determines long-term interest rates?
The loanable funds market
6What is money’s primary function?
It serves as a medium of exchange
7What is the historical order of money systems?
Barter, commodity money, hard money, fiat money
8What is commodity money?
Money that has value as a commodity itself
9What is hard money?
Money that can be redeemed for a fixed amount of a commodity, such as gold
10If a dollar can be exchanged for a fixed amount of gold, what type of money is it?
Hard money
11What is fiat money?
Money that has value because the government declares it legal tender and people accept it
12What does issuing hard money mean?
Issuing notes that are redeemable for a specified amount of a commodity
13What is fractional reserve banking?
A banking system in which banks keep only a fraction of deposits as reserves
14What is the reserve ratio?
The fraction of deposits that a bank must keep as reserves
15How is the reserve ratio calculated?
Reserve ratio = required reserves ÷ deposits
16If a bank has \$20 million in gold and issues \$100 million in redeemable notes, what is the reserve ratio?
20%
17What are funds in a checking account considered?
An asset, a medium of exchange, and part of M1
18What are typical bank assets?
Reserves and loans to customers
19What do rich nations typically have?
A lot of capital and specialization with trade
20What is M1?
A measure of the money supply that includes checking account deposits and other highly liquid money
21What is M2?
M1 plus certain less-liquid assets such as savings deposits and small time deposits
22What is the Money Multiplier formula?
Money multiplier = 1 ÷ reserve ratio
23How do you calculate the maximum change in the money supply?
Initial deposit × money multiplier
24If the reserve ratio is 10%, what is the money multiplier?
10
25If the reserve ratio is 20%, what is the money multiplier?
5
26If the reserve ratio is 100%, what is the money multiplier?
1
27If the reserve ratio is 10% and the initial deposit is \$20,000, how much can the money supply increase?
\$200,000
28If the reserve ratio is 100% and the initial deposit is \$1,000, how much can the money supply increase?
\$1,000
29How much can a bank loan from a \$10 million deposit with a 10% reserve ratio?
\$9 million
30How do you calculate required reserves?
Deposits × reserve ratio
31How do you calculate maximum loans?
Deposits − required reserves
32Who is the lender when you purchase a bond?
The person who purchases the bond
33Who is the borrower when a company issues a bond?
The company issuing the bond
34How does a bond’s price respond when market interest rates rise?
The bond’s price decreases
35How does a bond’s price respond when market interest rates fall?
The bond’s price increases
36How do you calculate a bond’s annual coupon payment?
Face value × coupon rate
37If a \$100,000 bond has a 5% coupon rate, what is its annual coupon payment?
\$5,000
38What happens to a 5% bond when similar bonds begin offering 10%?
Its market price decreases
39What is the basic present value formula for a bond?
PV = coupon payments discounted + face value discounted
40Why does a bond sell for less than face value when its coupon rate is below the market rate?
Investors require a lower price to earn the market rate
41What was the approximate value of the \$100,000 bond in the problem when market rates rose to 10%?
\$87,566