ECON-301 Final Exam
- American University
- Economics 301
- ECON-301 Final Exam
Last Modified: 2011-06-29
A structured product created by a bank that is made up of mortgages and other assets; these mortgages are sliced up into three tranches which are sold to people with different appetites for risk. The super senior tranche has the lowest interest rate but lowest risk; the mezzanine tranche has an interest rate between the other two and has medium risk; the toxic waste tranche has the highest interest rate but highest risk
A mortgage for borrowers who have a low credit rating and have a larger-than-average risk of defaulting on the loan. Banks charge a much higher interest on these loans to compensate themselves for carrying more risk
Seek to create an international standard to create regulations about how much capital banks need to put aside to guard against the various risks that they face. Generally speaking, the greater the risk to which the bank is exposed, the greater the amount of capital the bank should hold to safeguard its economic stability
Swap contract agreement where the CDS buyer, a holder of a bond or loan, makes a series of payments to the CDS seller (payments are the CDS fee) in exchange for payment if the bond or loan that the first person is holding defaults
Monetary policy is unable to stimulate the economy, either by lowering interest rates or increasing the money supply. Expansionary monetary policy would increase the money supply, but interest rates can’t fall any further, so the extra liquidity has no effect
When a government tries to stimulate demand by increasing debt-financed government spending, demand remains unchanged. The public will save its money to pay for future tax increases that will be initiated to pay off the debt
A calculation of what the government’s budget deficit would be if the economy was at a normal level of activity; assumes that rates of spending and taxation are unchanged
Financial difficulties being transferred from one entity (country, institution, etc.) to another, but they do not necessarily have to have a preexisting connection between them
Financial companies/institutions that are all brought down due to one “domino” falling; this is caused by their high level of interconnectedness. They often depend on each other so much that when one falters, many others could follow in its path
Fraudulent investment operation that pays returns to separate investors with either their own money or from money paid by subsequent investors, rather than from profit. Requires an ever-increasing flow of money from investors to keep the scheme going
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