Economics of Banking General Economic Term Paper

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e. no standardization) b) Diamonds: good medium of exchange

Peaches: perishable, differences in quality (i.e. no standardization) d) Grade a Honey: differences in quality (i.e. no standardization), difficult to transport e) Ice in a warm climate: perishable, difficult to store a. Over the long run, what is the primary determinant of the price level? Supply and demand, with price acting as an equilibrator b. Over the long run, what is the primary determinant of inflation?

The supply of money as compared to changes in productivity.

c. How is inflation related to the nominal interest rate?

Expectations of future inflation are one of the key factors in determining the nominal interest rate, the other being the 'core' interest rate, or the inflation-free level at which one is willing to lend money (which differs according to the issuer and associated risk premium).

4. Describe each of the following financial institutions. If it is a financial intermediary, describe what type of liabilities it issues and who holds these liabilities, as well as what kinds of assets it holds and who issued these assets.

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If it is not a financial intermediary, describe the role of the institution in the financial system. Read through chapter 13.

A a) Savings and Loans: A financial intermediary which issues mortgage loans to homeowners and receives consumer savings (traditionally).

A b) Commercial Banks: A financial intermediary which collects deposits from consumers and businesses, and loans to individuals and businesses for personal needs and working capital.

Money Market Mutual Funds: A financial intermediary which takes in investment from commercial institutions and individuals and buys money market instruments, chiefly short-term instruments like commercial paper and liquid government securities.

A d) Property and Casualty Insurance Companies: A financial intermediary which takes in premiums and pays based on claims for damages caused by discrete events, such as fire, floods and other natural disasters.

A e) Pension Funds: A financial intermediary which takes in deposits from individuals and pays out an amount based on promises of future benefits ("defined benefit") or based on financial results......

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