Second Guy (financial Crises)

Question 1

Define barter

Answer 1

Exchange of goods and services for other goods and services

Question 2

Who agreed with self sufficiency and benefits of specialization

Answer 2

Adam smith

Question 3

What is a problem with bartering

Answer 3

People over specialize so there is a problem with you have to work out the price of the good and find something willing to sell their good and someone willing to buy your good

Question 4

What is fiat money

Answer 4

Physical money that actually has no value. We only accept cash because everyone understands the value of it

Question 5

Explain the history behind why a system of credit was established

Answer 5

Because in ancient society natural disasters disrupted the households consumption patterns so with this system fortunate families could lend their surplus food to households negatively affected by the disaster.

Question 6

What is an example of direct finance

Answer 6

Bonds

Question 7

What is an example of indirect finance

Answer 7

Banks

Question 8

Which type of finance should big firms use and why

Answer 8

Direct finance like bonds because they are already established and have a good rep to be able to pay back the bond and the interest

Question 9

Which type of finance should small firms use and why

Answer 9

Indirect finance like banks because they lack the credentials to borrow so bank are more likely to be able to give it to them

Question 10

What is equity

Answer 10

What is owned by owners

Question 11

What is the bank if equity is positive

Answer 11

Solvent

Question 12

What is the bank if equity is negative

Answer 12

Insolvent

Question 13

Who does the balance sheet belong to you (the business owner) or the business itself

Answer 13

The business

Question 14

What is assets

Answer 14

What the firms owns

Question 15

What is listed under assets

Answer 15

Cash, accounts receivable, fixed assets, inventories

Question 16

What is listed under liabilities

Answer 16

Loans, accounts payable, bonds and equity

Question 17

What are always the same for a firms balance sheet

Answer 17

Assets always has to equal liabilities

Question 18

If the firm has never borrowed any money then what would you have

Answer 18

Only equity

Question 19

So if you have 100% equity what is this equal to

Answer 19

The value of the company

Question 20

What is liabilities

Answer 20

What the firm owes to various people

Question 21

What is calculate to find equity provided they have borrowed money

Answer 21

Assets - liabilities (exc equity) = equity

Question 22

When are you indebted

Answer 22

When liabilities is a large number than the assets

Question 23

What does autarky mean

Answer 23

An economy that is self sufficienct

Question 24

What is the calculation for the random walk model

Answer 24

Pt+1 = Pt + errors(t)
Errors that are independently distracrldd time drawn from a normal distribution with mean = 0

Question 25

How much would assets have to decrease by for apple to become insolvent

Answer 25

50%

Question 26

Explain the bank risk illiquidity

Answer 26

When the balance sheet is dominated by deposits and loans so too many depositors withdraw their funds at the same time and the bank doesn’t have enough to satisfy the demand for this

Question 27

Explain the coordination game

Answer 27

You have deposited X at the bank And it offers interest rate r on the account You need to decide whether you’re going to withdraw the funds or not Your payoff depends on the other depositors at the bank

Question 28

Explain why people all take their money out during a bank run

Answer 28

Whenever they hear the news a bank might be at risk of becoming insolvent they all become self fulfilling so all take their money out

Question 29

Explain contagion

Answer 29

Banks borrow money from other banks and this creates a detailed interbank network. So when one bank becomes insolvent it takes funds from solvent banks and can cause then to have trouble too

Question 30

What are the 2 types of systemic risk

Answer 30

Correlation (of asset returns across the banking system) and externalities (because of interconnectedness)

Question 31

Define speculative attack

Answer 31

Large scale selling of a currency by investors in a foreign exchange market

Question 32

Define maturity mismatch

Answer 32

Banks usually borrow short term but lend long term

Question 33

Define currency mismatch

Answer 33

In many countries banks also borrow in foreign currencies while they lend in the domestic currency

Question 34

What do matrix and currency mismatches cause

Answer 34

Significantly increase the economic cost of a currency crisis. Mature mismatch leads to liquidity problems so banks have to liquidate their assets to meet demand