How do depository institutions balance risk and return?
What will be an ideal response?
Banks earn a higher return by using the funds they acquire from their deposits to buy higher-yielding, riskier assets such as loans. But these assets are risky. If the loans fail, then the bank might not have sufficient funds to repay their depositors. If the bank undertakes too much risk, then its depositors might rush to withdraw their deposits, which would cause the bank to fail. But if the bank forgoes all risky assets its profit will be much lower. So the bank must balance its search for higher return against the risk earning the return entails.
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In the Great Recession of 2007-2009, the stock market values shrank, causing a reverse ________.
A. interest-rate effect B. wealth effect C. real-balances effect D. expectations effect
How does a decrease in the federal budget deficit affect the demand for dollars and the supply of dollars on the foreign exchange market?
A) The demand for dollars falls, and the supply of dollars falls. B) The demand for dollars rises, and the supply of dollars falls. C) The demand for dollars rises, and the supply of dollars rises. D) The demand for dollars falls, and the supply of dollars rises.
Which group is hurt by inflation being less than expected?
A) holders of TIPS B) lenders of fixed-rate mortgages C) borrowers with fixed-rate mortgages D) all of the above
Refer to Figure 4.2. The income effect on the quantity of clothing purchased is:
A) the change from C1 to C3. B) the change from C1 to C2. C) the change from C2 to C3. D) the change from C3 to C2. E) none of the above