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CHAPTER 1 Question and Answer from Study Guide
Simplicity is the best
Explain briefly and in general terms what is the meaning of a
security and how it facilitates direct lending and borrowing. (5)
A security is sometimes called financial instrument, that gives a claim on the issuer’s future income
or assets (any financial claim or piece of property that is subject to ownership). There are two main
types of securities namely the bond security and the stock security.
A bond is an example of a debt security, that promises to make payments periodically for a
specified period of time. Direct lending and borrowing is possible through the purchase of the
bonds by individuals or companies of government bonds, or purchase of corporation bonds,
municipality bonds. As individuals purchase these bonds, there are giving the government,
municipality or a corporation their surplus funds and the issuer is borrowing, and thus direct
lending and borrowing.
A common stock, sometimes called a stock or share is another form of a security. This type of
security represents a form of ownership in a corporation. It is a security that has a claim on the
earnings and assets of the corporation, through dividends or residual part upon liquidation. Issuing
stock and selling it to the public is a way for corporations to raise funds to finance their activities.
Stock in relationship to direct lending, means that those with surplus funds will purchase the share
in a corporation, the corporation will use the funds. In this regard, there is direct lending and
borrowing.
Explain briefly what a common stock is, what purpose it serves and
how it affects business investment decisions. (4)
,A common stock, sometimes called a stock or share is another form of a security. This type of
security represents a form of ownership in a corporation. It is a security that has a claim on the
earnings and assets of the corporation, through dividends or residual part upon liquidation.
A common stock serves as a claim against the issuer of the stock by the holder of the stock
certificate. It serves as way corporation use to obtain funds for investments. Common stock in the
stock market is important in the business investment decision making, because the higher the stock
price the large the amount the funds the corporation will get upon issuing new shares, and the
greater is the funds available for investment.
1.3 List two ways in which the quantity of money may affect the
economy. (2)
The quantity of money affects the economy through the aggregate output, that leads to
business cycles. In this regard quantity of money affects output, employment level. Any
increase in the quantity of money may lead to increase in the output and employment levels.
Money also affects the economy through the aggregate price levels which is inflation. It is
assumed the increase in the quantity of money can lead to increase in the price level, that
is causing inflation.
1.4 Explain the difference between nominal and real GDP and the
purpose for which each should be used. (4)
Nominal gdp is that gdp that has not been adjusted to the rate of inflation while, real gdp is the gdp
that has been adjusted to the rate of inflation through the deflator method. The deflator component
is the rate of inflation, saying you have 2015 nominal gdp and 2016 nominal gdp, you can use the
gdp deflator to calculate the real gdp, and the inflation rate in the economy.
1.5 List and define three commonly used measures of the aggregate
price level. (6)
Consumer price index (1st year staff)
Producer price index
,GDP deflator
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Chapter 2 Question and Answer from Study Guide
Simplicity is the best
2.1 Briefly explain the function of financial markets, the meaning
of direct and indirect financing and the meaning of a financial
intermediary. (5)
Financial markets are responsible for channeling funds from households, firms, and governments
who have saved surplus funds by spending less than their income to those who have a shortage of
funds because they wish to spend more than they earn. In short financial intermediaries are
responsible for connecting the net borrowers with net savers.
Direct financing occurs when borrowers, borrow funds directly from lenders in financial markets
by selling them securities (also called financial instruments), which are claims on the borrower s
future income or assets. Indirect financing occurs when financial intermediaries facilitates the
linking between the net borrowers and net savers.
Financial intermediaries are institutions responsible for linking the net savers and net borrowers
together. Examples of financial intermediaries include banks and insurance companies.
2.2 Explain the differences between debt and equity markets, primary
and secondary markets, exchanges and OTC markets, and money and
capital markets. (10)
Debt market differs from the equity market, in the sense that debt instruments are sold in the debt
market while stock or shares are sold in the equity market. Debt instruments are issued in the debt
market by the issuer to obtain funds from the instrument holder, like bond or mortgage. On the
other hand, equities are issued in the equity market. A clear difference can be brought up when we
compare the instruments in each of these markets, their characteristics.
Instruments sold in the equity market do not have maturity date, while the instruments sold in the
debt market have maturity date. In other words, we are saying debt instruments like bonds have
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