Explain the meaning of surplus units and deficit units

Chapter 1 Questions:

1. Surplus and Deficit Units. Explain the meaning of surplus units and deficit units. Provide an example of each. Which types of financial institutions do you deal with? Explain whether you are acting as a surplus unit of a deficit unit in your relationship with each financial institution.

3. Imperfect markets. Distinguish between perfect and imperfect security markets. Explain why the existence of imperfect markets creates a need for financial intermediaries.

4. Efficient Markets. Explain the meaning of efficient markets. Why might we expect markets to be efficient most of the time? IN recent years, several securities firms have been guilty of using inside information when purchasing securities. Does this suggest that the security markets are not efficient?

5. Securities Laws. What was the purpose of the Securities Act of 1933? What was the purpose of the Securities Exchange Ace of 1934? Do these laws prevent investors form making poor investment decisions?

6. International Barriers. If barriers to international securities markets are reduced, will a country’s interest rat be more or less susceptible to foreign lending and borrowing activities?

8. Securities Firms. What are the functions of securities firms? Many securities firms employ brokers and dealers. Distinguish between the functions of a broker and those of a deals, and explain how each his compensated.

9. Standardized Securities. Why do you think securities are commonly standardized? Explain why some financial flows of funds cannot occur through the sale of standardized securities. If securities were not standardized, how would this affect the volume of financial transactions conducted by brokers?

11. Depository Institutions. Explain the primary use of funds by commercial banks versus savings institutions.

14. Mutual Funds. What is the function of a mutual fund? Why are mutual funds popular among investors? How does a money market mutual fund differ from a stock or bond mutual fund?

19. Impact of Credit Crisis on Liquidity. Explain why the credit crisis caused a lack of liquidity in the secondary markets for many types of debt securities. Explain how such a lack of liquidity would affect the prices of the debt securities in the secondary markets.

Chapter 2 Questions:

2. Interest Elasticity. Explain what is meant by interest elasticity. Would you expect the federal government’s demand for loanable funds to be more or less interest-elastic than household demand for loanable funds? Why?

5. Impact of the Economy. Explain how the expected interest rate in one year depends on your expectation of economic growth and inflation.

7. Impact of Exchange Rates on Interest Rates. Assume what if the US Dollar strengthen it can place downward pressure on the US inflation. Based on this information, how might expectation of a strong dollar affect the demand for loanable funds in the US and the US interest rates? Is there any reason to think that expectation of a strong dollar could also affect the supply of loanable funds?

8. Nominal versus Real Interest Rates. What is the difference between the nominal interest rate and the real interest rate? What is the logic behind the implied positive relationship between expected inflation and nominal interest rates?

12. Impact of Expected Inflation. How might expectation of higher oil prices affect the demand or loanable funds, the supply of loanable funds, and interested rates in the US? Will the interest rates of other countries be affected in the same way?

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