1.) A. Created an uneven playing field between big and small firms. Unfair competition, together with
the incentive to grow that too-big-to-fail provided, increased risk and artificially raised the market
share of too-big-to-fail firms, to the d
Participants in Securities Markets
-individual savers and financial institutions
- Citizens own 28% of the stock of U.S companies, 25% corporate stock
securities firms: holds securities, trade them, or help others trade them.
- Mutual fund
Commercial banks: largey part of the banking industry
Saving institutions: accepting saving deposits and lending for home mortages.
Credit union: nonprofit bank
Finance companies: makes loans , does not receive deposits, raise funds by issuing
Financial crisis and the Economy
Lending and spending: a fall in asset prices can cause a sharp fall in aggregate demand
Reason:asset holders lose wealth, reduces their consumption
Credit crunch: a sharp decrease in bank lending
1. In a study by Brehm and Weintraub on the reactions of 2-year-old boys
to an obstructed
toy, what happened?
The boys went to the obstructed toy faster whether or not the
obstruction was large
enough to hinder their access to the toy.
Chapter 1 Checklist Questions
1.) The IS curve is a way of summarizing in a diagram the demand side in the
macroeconomic model, showing the combinations of the interest rate and output at
which aggregate spending in the economy is equal to output. The IS
Discussion Question 5
For households, the collapse of a housing bubble, which also tends to cause a stock market
crash, results in a decline in home equity as well as the loss of retirement and education
savings. When combined with the loss of jobs due to
When the policy interest rate is as low as it can be, central banks use asset purchases to try to
boost asset prices and lower yields. In this example there are only two types of bonds shortterm (S) and long-term (L) and their nominal interest rates a
Macroeconomics and the Financial Markets
What determines expectations?
- An asset price depends on the present value of expected asset income.
- People form rational expectations (they use all available information to forecast future