Summary: The Economics of Money, Banking and Financial Markets by Mishkin Questions and Answers 2023

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What is the main center of the Eurodollar market? - -London -Name a financial innovation that grew out of the bank branching restrictions. - -Bank Holding Companies and ATMs -What is a subprime ... mortgage? How did their availability affect the demand for housing? - -Thought initially to be a "democratization of credit" but was basically a mortgage issued to someone who really didn't have the resources to pay it or "mortgages for borrowers with less than stellar credit." The expansion of credit through subprime mortgages and other new financial innovation contributed to home price appreciation. And as home prices climbed, credit standards fell, further fueling an increase in demand for housing and rising prices. By 2006, home prices began to peak, the expansion of credit retracted, and the housing market eventually collapsed. -How does asymmetric information affect the lending market? Who usually has better information about the investment: the borrower or the lender? - -The presence of asymmetric information (the unequal knowledge that each party to a transaction has about the other party) leads to adverse selection and moral hazard. The borrow has better information about the investment (their ability to pay it back, etc.) -Explain the efficient market hypothesis (EMH) and its implications. - -EMH states that current security prices will fully reflect all available information, because in an efficient market, all unexploited profit opportunities are eliminated. The elimination of unexploited profit opportunities necessary for a financial market to be efficient does not require that all market participants be well informed. [Show More]

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