Homework 1

Economics 470/570
Winter 2005
Review Question Set for Week #1

Definitions

Medium of exchange/Double coincidence of wants

Unit of account/Multiplicity of prices

Store of value/Liquidity

Financial intermediary

Direct and indirect finance

Liquidity

Short Answer

1. How is money measured? Why is there more than one definition of the money supply?

2. How do bonds and equities differ? Which is more risky?

3. How do bond and equity markets differ? How do primary and secondary markets differ? How do money and capital markets differ?

4. Explain how secondary markets determine the price of new securities and why they make new securities easier to sell. How do over-the-counter markets and organized exchanges differ?

5. List and briefly describe the various money market instruments.

6. List and briefly describe the various capital market instruments.

Essay

1. Why study of money? Why study banking? Why study financial markets?

2. What are the functions of money, i.e. why does money exist? Relative to a barter economy, what problems are overcome by the use of money?

3. Describe the main function of financial markets. Explain how direct finance and indirect finance differ. Among households, government, business, and the foreign sector, who are the biggest borrowers/lenders?

4. How do financial intermediaries, through their ability to pool resources promote more efficient use of financial resources? Be sure to cover risk pooling, the pooling of small investors, and pooling over time in your answer.

5. How do financial intermediaries reduce default risk, transactions costs, and matching costs?