Economics 311 Review Questions 1 Professor Tom K

Economics 311 Review questions Professor Tom K. Lee (There will be exam questions not from the review questions.) Name & explain the three advantages of a monetary economy. Name and explain the four functions of money. Name & explain the characteristics of money. Define money supply & explain the two measures of money supply. Name & explain the relations between money supply growth rate and the following: inflation rate, business cycle, nominal interest rate and the federal gov't budget deficits. Name and explain the Fisherian Theory of Interest Rate. Define and explain the federal government budget constraint. State & explain the circular flow of a 3-sector 3-market economy. Define diversification and state the Insurance Principle. Define and explain financial intermediation & its functions. Define investment opportunity frontier, indifference curves & consumption opportunity curve, & explain the importance of financial intermediaries & financial markets to an economy. Name & explain depository institutions, contractual savings institutions & investment intermediaries, & their sources & uses of funds. Name & explain money, bond, stock and foreign exchange market. Compare and contrast these mkts: spot, forward, futures & options. Name and explain money mkt instruments & capital mkt instruments. Define & explain foreign bonds, Eurobonds & Euroequities. Name & explain the regulatory agencies of: commercial banks, savings & loans associations and credit unions. Name & explain the relation between bond prices & interest rates. State the determinants of the demand for and the supply of bonds and explain the equilibrium determination of bond prices. Why do interest rates differ? Name and explain the theories of term structure of interest rates. What is risk(default) premium? What are the off-balance-sheet activities of commercial banks? Name and explain the four primary problems of bank management. Name and explain how a bank can solve its liquidity problem. Define a minimum variance opportunity set, an efficient set, the capital market line & indifference curves, and make use of the above concepts to explain how risk is priced. Name and explain the measures of interest rate risk. Name and explain the strategies of interest rate risk management. Name & explain the 2 methods for the FDIC to handle failed banks. Define bank reserve and explain required reserve regulation. Define money supply & explain how the three sectors of an economy affect the money supply of the economy. Define and explain potential money supply multiplier. Define and explain actual money supply multiplier. State and explain the money creation process. Name and explain the relation between money supply and bank credit and their respective multipliers. Compare and contrast the 3 forms of gov't financing. Name & explain the two types of open market operations. Define the goals of the Federal Reserve Bank. State and explain the three types of discount loans. What are the four costs of borrowing discount loans? What are the four advantages of open market operations? What are the four disadvantages of discount policy? What are the disadvantages of required reserve regulation? State and explain contemporaneous reserve requirements. Define the velocity of money, state the equation of exchange and state & explain the Simple Quantity Theory of Money. State the assumptions of the Classical Theory, and explain how its endogenous variables are determined. Define & explain neutrality, dichotomy & crowding-out effect. Graphically demonstrate how to construct an IS(LM) curve. State the product market equilibrium condition, define an IS curve and explain why it is downward sloping. State the money market equilibrium condition, define an LM curve and explain why it is upward sloping. State the assumptions of the 2nd generation Keynesian model and explain how the endogenous variables are determined. Name and explain the 8 monetary transmission mechanism. Define aggregate demand and explain why it is downward sloping. State and explain the determinants of aggregate demand. Define aggregate supply and explain why it is upward sloping. State and explain the determinants of aggregate supply. Make use of the aggregate supply and demand concepts to explain the following four concepts: stagflation, deflationary growth, recession and inflationary growth. Compare & contrast AD vs AS management policies. State the assumptions of the 4th generation Keynesian model and explain how its endogenous variables are determined. Compare & contrast anticipated vs unanticipated policies. Define foreign exchange rates, appreciation vs depreciation, and devaluation vs revaluation. State the two determinants of the demand for and the two determinants of the supply of US $ in the foreign exchange mkt. Define trade balance vs equilibrium foreign exchange rates. State and explain the Law of One Price. State & explain the absolute(relative) form of Purchasing Power Parity. Define & explain the long-run determinants of exchange rates. State & explain Open vs Covered Interest Parity. State & explain the relation between federal gov't budget deficits & trade deficits.