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ECO 412 EXAM 1 QUESTIONS WITH COMPLETE ANSWERS.
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ECO 412 EXAM 1 QUESTIONS WITH COMPLETE ANSWERS.
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ECO 412 EXAM 1 QUESTIONS WITHCOMPLETE ANSWERS
Financial ccinstruments ccusually ccserve cctwo ccdistinct ccpurposes. ccWhat ccare ccthey?
ccGive ccan ccexample ccfor cceach. cc- ccAnswer ccTo ccstore ccvalue: ccbank ccaccounts,
ccstocks, ccand ccbonds.
To cctransfer ccrisk: cccar ccinsurance ccand cclife ccinsurance.
Explain cchow ccfinancial ccinnovation cchas ccreduced ccindividuals' ccneed ccto cccarry
cccash. cc- ccAnswer ccThere ccare ccalternative ccmethods. ccElectronic ccforms cc(credit
ccand ccdebit cccards) ccare ccthe ccprimary ccones ccthat cchave ccreduced ccthe ccneed ccto
cccarry cccash.
Many ccpeople ccbelieve ccthat, ccdespite ccongoing ccfinancial ccinnovations, cccash ccwill
ccalways ccbe ccwith ccus ccto ccsome ccdegree ccas cca ccform ccof ccmoney. ccWhat cccore
ccprinciple cccould ccjustify ccthis ccview? cc- ccAnswer ccCore ccprinciple cc3 cc- ccinformation
ccis ccthe ccbasis ccfor ccdecisions.
When ccyou ccapply ccfor cca ccloan, ccyou ccare ccrequired ccto ccanswer cclots ccof
ccquestions. ccWhy? ccWhy ccis ccthe ccset ccof ccquestions ccyou ccmust ccanswer
ccstandardized? cc- ccAnswer ccThe ccquestions ccare ccaimed ccat ccfiguring ccout cchow
cclikely ccyou ccare ccto ccrepay ccthe ccloan. ccThey ccare ccstandardized ccto ccreduce ccthe
cccost ccof ccmaking ccthe ccloan.
Name cctwo ccdistinct ccfinancial ccmarkets ccand ccdescribe ccthe cckind ccof ccasset cctraded
ccin cceach. cc- ccAnswer ccStock ccmarkets: ccequities ccor ccownership ccshares ccin
cccompanies ccare ccbought ccand ccsold
Bond ccmarket: ccdebt ccissues ccof ccgovernment ccunits ccor cccompanies ccare cctraded.
If ccoffered ccthe ccchoice ccof ccreceiving cc$1,000 cctoday ccor cc$1,000 ccin ccone ccyear's
cctime, ccwhich ccoption ccwould ccyou ccchoose, ccand ccwhy? cc- ccAnswer ccCore ccprinciple
cc1 ccstates ccthat cctime cchas ccvalue, ccso ccyou ccshould ccchoose ccoption cc1. ccBy
ccreceiving ccthe cc$1000 cctoday, ccyou cccan ccimmediately ccput ccthe ccmoney ccto ccuse.
ccPerhaps ccyou ccbuy cca ccnew cccomputer ccor ccput ccthe ccmoney ccin ccthe ccbank ccto
ccearn ccinterest. ccRegardless ccof ccwhat ccyou ccdo ccwith ccthe ccmoney, ccwaiting cca
ccyear ccto ccreceive ccthe ccmoney ccinvolves ccan ccopportunity cccost.
, If cctime cchas ccvalue, ccwhy ccare ccfinancial ccinstitutions ccoften ccwilling ccto ccextend ccyou
cca cc30-year ccmortgage ccat cca cclower ccannual ccinterest ccrate ccthan ccthey ccwould
cccharge ccfor cca ccone-year ccloan? cc- ccAnswer ccWith cca ccmortgage, ccthe cchouse ccyou
ccpurchase ccacts ccas cccollateral ccfor ccthe ccloan. ccIn ccthe ccevent ccyou ccdefault, ccthe
ccbank cccan ccsell ccthe cchouse ccand ccrecoup ccits ccfunds. ccThe ccexistence ccof
cccollateral ccreduces ccthe ccrisk ccassociated ccwith ccthe ccloan ccand ccso ccreduces ccthe
cccompensation ccthe ccbank ccrequires.
Using ccCore ccPrinciple cc2, ccunder ccwhat cccircumstances ccwould ccyou ccexpect cca ccjob
ccapplicant ccto ccaccept ccan ccoffer ccof cca cclow ccbase ccsalary ccand ccan ccopportunity ccto
ccearn cccommission ccover ccone ccwith cca cchigher ccbase ccsalary ccand ccno cccommission
ccpotential? cc- ccAnswer ccThe ccapplicant ccwould cchave ccto ccexpect ccto ccearn cca
cchigher cctotal ccsalary ccworking ccfor cca cclow ccbase ccand cccommission, ccas ccthey
ccrequire cccompensation ccfor ccthe ccrisk ccthey ccassume ccdue ccto ccthe ccuncertainty
ccabout ccthe cclevel ccof cccommission ccearnings.
Suppose ccmedical ccresearch ccconfirms ccearlier ccspeculation ccthat ccred ccwine ccis
ccgood ccfor ccyou. ccWhy ccwould ccbanks ccbe ccwilling ccto cclend ccto ccvineyards ccthat
ccproduce ccred ccwine ccat cca cclower ccinterest ccrate ccthan ccbefore? cc- ccAnswer ccThe
ccfuture ccprospects ccfor ccthe ccvineyards cchave ccimproved, ccreducing ccthe ccrisk
ccinvolved ccin cclending ccto ccthem. ccThe ccbanks ccrequire ccless cccompensation ccthan
ccbefore.
If ccthe ccU.S. ccSecurities ccand ccExchange ccCommission cceliminated ccits ccrequirement
ccfor ccpublic cccompanies ccto ccdisclose ccinformation ccabout cctheir ccfinances, ccwhat
ccwould ccyou ccexpect ccto cchappen ccto ccthe ccstock ccprices ccfor ccthese cccompanies? cc-
ccAnswer ccYou ccshould ccexpect ccthe ccstock ccprices ccto ccfall. ccGathering ccsufficient
ccinformation ccupon ccwhich ccto ccmake ccan ccinformed ccinvestment ccdecision ccwould
ccbecome ccmuch ccmore cccostly ccfor ccinvestors, ccreducing ccthe ccdemand ccfor ccthe
ccstock ccat cca ccgiven ccprice.
Why ccare cclarge, ccpublicly cclisted cccompanies ccmuch ccmore cclikely ccthan ccsmall
ccbusinesses ccto ccsell ccfinancial ccinstruments ccsuch ccas ccbonds ccdirectly ccto ccthe
ccmarket, ccwhile ccsmall ccbusinesses ccget cctheir ccfinancing ccfrom ccfinancial
ccinstitutions ccsuch ccas ccbanks? cc- ccAnswer ccThe ccinformation cccosts ccassociated
ccwith ccsmall ccbusinesses ccare cchigher ccthan ccthose ccfor cclarge, ccpublicly cclisted
cccompanies, cccosts ccthat ccbond ccmarket ccinvestors ccare ccunlikely ccto ccbe ccwilling ccto
ccincur. ccBanks ccare ccskilled ccat ccgathering ccinformation ccabout ccborrowers ccand
ccevaluating ccthe ccrisks ccassociated ccwith ccloans. ccTherefore, ccthey ccare ccmore cclikely
ccto ccbe ccwilling ccto cclend ccto ccsmaller ccbusinesses.
Describe ccat ccleast ccthree ccways ccyou cccould ccpay ccfor ccyour ccmorning cccup ccof
cccoffee. ccWhat ccare ccthe ccadvantages ccand ccdisadvantages ccof cceach? cc- ccAnswer
ccMoney: ccThis ccis ccthe ccmost cclikely ccto ccbe ccaccepted, ccbut ccit ccmeans ccyou cchave
ccto ccreplenish ccyour ccsupply ccperiodically.
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