Review sheet #1
Financial sector:
1- What is the difference between direct finance and indirect finance?
2- What is the main difference between depository institutions (‘bank’) and other financial intermediaries
(‘non-bank financial intermediaries’)?
3- What is the difference between capital market and money market?
4- What is a primary market? A secondary market?
5- What is an underwriter? A broker? A dealer? A specialist?
6- What are the two ways to organize a secondary market?
7- What are the main implications of the DIDMCA in terms of issuance of checkable deposits, reserve and
access to the Fed credit facilities?
Financial market and economic theory
1- What are the eight puzzles identified by Mishkin regarding the financial sector?
2- What is the role of financial market in the New Keynesian view? In the Post Keynesian view?
3- What is the role of banks in the New Keynesian view? i.e. why do banks exist for the New Keynesians?
4- What is the difference between finance and funding?
5- Can saving finance investment for the Post Keynesians? For the New Keynesians? Explain.
6- Why do banks exist for Post Keynesians?
7- Why is liquidity a double-edged sword?
Non-bank financial intermediaries
1- What is the difference between a defined-contribution plan and a defined-benefit plan?
2- What is a business finance company? What does it do? Explain
3- If a T-bond is quoted at 85:12 what is its price in dollar? What about 105:30+?
4- What is a circuit breaker?
5- How is liquidity measured?
The Federal Reserve System
1- Briefly present the history of the U.S. monetary system?
2- Describe in detail the organization of the Federal Reserve System: main components, structure of each
component, functions.
3- What is the beige book?
4- What are the two types of central bank independence? Which one, according to Fisher, is the best?
5- Can a central bank be too independent?
History of Money
1- Why did exchange not occur in primitive societies?
2- What is the difference between trade and exchange?
3- What kind of obligations did exist in primitive societies? Were they economic obligations?
4- How was compensation done? What is a payment?
5- What was the role of money-things in primitive societies?
6- Why was there no unit of account in primitive societies?
7- What kind of different obligations from the primitive societies, existed in archaic societies? How did they
emerge?
8- How are those obligations related to the emergence of a unit of account?
9- Why did archaic societies need a unit of account? Who did establish it?
10- How were the transactions between the temples/palace and the public recorded?
11- Was there any money-things used as medium of exchange? What were the main functions of money?
12- Was barter a normal way to exchange? Was internal exchange well developed?
13- How was external exchange (foreign trade) done: barter or accounting recording?
14- Was there a search for monetary gain?
15- What was the main role of fair from 3000BC to the medieval period?
16- What is a tally? Were coins the first tallies?
17- When did coins emerge? When did the first money-things emerge?
18- Is the gold-standard the normal monetary system or was it an incidental event in the history of money?
19- What was the first role of banks? When did they appear?
Money: theory, definition
1- What is the orthodox theory of money? How does it fit with historical evidence?
2- Do banks need to wait savers before be able to create money?
3- What are the four functions of money? Explain in details
4- Why is money used as a store of value? Can money become illiquid?
5- What is the orthodox story of the evolution of the means of payment?
6- Today, what is counted as money?
7- What is M1? Explain carefully.
8- Why are saving deposits included in M2? What is the method of classification of the different monetary
aggregates?
9- What is M0?
Interest rate: definition and theory
1- What is the coupon rate? What is the coupon and how is it calculated?
2- What is the yield to maturity? What is the main drawback of this method of calculating the yield?
3- What is the rate of return? How is it different from the coupon rate or from the yield to maturity?
4- What is the fair price of a consol? What does it implies in terms interest rate and price relationship?
5- What is Fisher’s equation of interest rate? Does this equation protect against loss of purchasing power?
Why, Why not?
6- Explain in details the loanable funds theory:
i. How is the S curve determined? How is the I curve determined?
ii. How is the equilibrium rate of interest determined? (Both nominal and real interest rates)
What happens if there is an excess of loanable funds? What about a shortage?
iii. Implications in terms of interest rate theory.
iv. Implication in terms of the effect of investment on the rate of interest.
7- Explain in details the simple liquidity preference theory:
i. How are L1 and L2 determined?
ii. How is the equilibrium nominal rate of interest rate determined? What happens if there is
an excess supply of money? What happens if there is a shortage of money? (Discuss only
the direct effects).
iii. Implications in terms of interest rate theory.
iv. Implication in terms of the effect of investment on the rate of interest.
8- Are the liquidity preference theory and the loanable funds theory, the same theories?
Derivatives
1- What is the difference between a forwards and a futures?
2- Is it always interesting to buy an option? Why not?
3- What is the premium of an option?
4- What is the strike price?