Macroeconomics Written Assignment 3

Topics: Monetary policy, Central bank, Inflation Pages: 3 (971 words) Published: August 17, 2013
Principles of Macroeconomics
Written Assignment 3

1. The role of the financial system is to help match one persons savings with another person's investment.

2 types of market :
Stock market - represents ownership in a firm and is, therefore, a claim to the profits that the firm makes. Bond Market - a certificate of indebtedness that specifies the obligations of the borrower to the holder of the bond.

2 types of intermediaries :
Banks - take deposits from people who want to save and use these deposits to make loans to people who want to save. Mutual Fund - sells shares to the public and uses the proceeds to buy a selection, or portfolio of various stocks and bonds.

2. A government budget deficit is an excess of government spending over tax revenue.This affects investments and the economy because in order for the government to reduce the deficit they will need to cut programs and raise taxes. Higher taxes mean people spend less, invest less and the economy will decline due to lack of consumers spending money.

3. A benifit from insurance is the coverage of risk and accidents.

Adverse Selection : A high risk person is more likely to apply for insurance.

Moral Hazard - after people buy insurance they are more likely to be less cautious because the insurance company will pay for all the risk involved.

4. Efficient market hypothesis is the theory that asset prices reflect all publicly available information about the value of an asset. One piece of evidence that is consistent with this theory are the shares of companies in the stock exchange. The news and public information on a company greatly affects the demand of shares in a particular company and if the demand rises, so does the price. If the demand falls, the price will drop as well. Just by looking at the history of a stock’s prices, it will give general knowledge on how well a stock will do in the future.

5. The three main categories that the Bureau of Labor Statistics divides...
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