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Macroeconomics Study Set 45

Business

Quiz 10 :

The Financial Sector and the Economy

Quiz 10 :

The Financial Sector and the Economy

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The major measures of money are M1 and M2.What are the major components of each of these measures? Why do economists focus their attention on M2?
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M1 is a measure of money that consists of currency in the hands of the public, checking account balances, and traveler's checks.
M2 is a measure of money that consists of all the types of money in M1 plus savings deposits, small-denomination time deposits, and money market mutual fund shares.Economic research has shown that M2 is the measure of money that is most closely correlated with the price level and economic activity.

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What does it mean to say that money is liquid?
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Saying that money is liquid means that money can be easily exchanged for another asset or good.

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What is the interest rate? How does it relate to the buying and selling of financial assets?
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The interest rate is the price paid for the use of a financial asset.The interest rate varies to give people the incentive to buy or sell financial assets.Specifically, when the interest rate rises people are more likely to buy a financial asset (lend money) and less likely to sell a financial asset (borrow money).

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What is the relationship between the real side of the economy (economic activity that results in the creation of real assets) and the financial side of the economy (economic activity that results in the production of financial assets)? Your discussion should cover the following points: How does the production of real assets differ from the production of financial assets? Does the creation of financial assets really contribute to overall economic productivity? Do financial assets make a country richer or poorer? What role do financial assets serve (if any) in facilitating the production of real assets?
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What is money? What is a liquid financial asset? Why do people hold their assets in the form of money?
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Explain how banks create money.Compare the effect on the money supply of accepting a cash deposit with that of making a loan.
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Describe the difference between a commercial bank and the central bank.
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Explain the difference between the way real assets are created and the way financial assets are created.
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A story often told about the emergence of banks is that banks first emerged from the activities of goldsmiths, who stored gold for a fee.Briefly describe this story.
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You are holding two bonds; one matures in 1 year and the other matures in 30 years.What do you expect to happen to the price of each bond when the interest rate rises? For which bond will the effect of a change in interest rates be greater?
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All M1 assets are included in M2.We will call those assets that are part of M2 but not part of M1, "M2 assets".You have just received $5,000 that you must hold as either an M1 asset or an M2 asset.What are the costs and benefits of holding the $5,000 as an M1 asset rather than as an M2 asset? Explain.
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Why is the financial sector important in macroeconomic debates?
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The three functions of money are to serve as: (1) a medium of exchange, (2) a unit of account, and (3) a store of wealth.Briefly explain each of these functions and give an example of each.
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Explain the distinction between a real transaction and a financial transaction (giving examples of each) and explain why for most real transactions, there is a financial transaction that mirrors it.
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Why is the financial sector important in macroeconomic debates? Why are macroeconomists concerned with the total amount of flows coming out of and returning to spending?
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"Credit cards make a difference in how much money people hold, but they are not money." Explain this statement.
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Why is money important from a short-run macroeconomic perspective?
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Define financial assets, and explain why every financial asset must correspond to a financial liability.
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What is money? What are the three functions of money?
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What are M1 and M2?
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