ECON 203 Exam 3 (Pakhotina) Latest Update 2026-
2027 Exam 225 Questions with 100% Verified Correct
Answers Guaranteed A+
2 basic factors driving differences in interest rates - CORRECT ANSWER: 1. loan term - the
longer the term is, the higher the interest rate will be (lenders want to be compensated for the
opportunity cost)
2. the risk - the higher the risk of default by the borrower, the higher the interest rate
3 bank functions - CORRECT ANSWER: 1. serve as an intermediary
2. provide liquidity
3. diversify risk
3 functions of money - CORRECT ANSWER: 1. Store of value: money represents a certain
amount of purchasing power
2. Medium of exchange: money can be used to purchase goods and services
3. Unit of account: money provides a standard unit of comparison
3 major financial assets - CORRECT ANSWER: 1. Equity
2. Debt
3. Derivatives
4 major players in the financial system - CORRECT ANSWER: 1. Banks and other financial
intermediaries (commercial/investment banks)
2. Savers and their proxies (mutual funds, pension funds, life insurances companies, banks, etc)
3. Entrepreneurs and businesses
4. Speculators (anyone who buys and sells financial assets purely for financial gain)
,Bank functions: intermediation - CORRECT ANSWER: Bank serves as intermediary between
savers and borrowers. Bank connects the borrower to a wide range of people who have spare
funds.
Bank functions: liquidity provision - CORRECT ANSWER: Bank makes cash more readily
accessible when and where you want it
-no need to keep cash on hand
-ATMs, checkbooks and credit cards allow instant access to cash when it is needed
Bank functions: risk diversification - CORRECT ANSWER: Bank pools many borrowers and
lenders together, so individual saver does not bear the full burden of a failed investment
-a few borrowers will default their loans, but most will repay
Benefits of public debt - CORRECT ANSWER: 1. It allows the government to be flexible when
something unexpected happens
2. Government debt can pay for investments that lead to economic growth and prosperity
Borrowers (buyers) - CORRECT ANSWER: Want to spend funds on something valuable now
Examples:
-families buying houses
-students taking out loans to go to college
-corporations building new factories
-entrepreneurs starting new ventures
-government
Budget deficit - CORRECT ANSWER: The amount of money a government spends beyond its
revenue (expenditures > revenues)
,Budget surplus - CORRECT ANSWER: The amount of revenue a government brings in beyond
what it spends (expenditures < revenues)
Central bank - CORRECT ANSWER: The institution responsible for managing the nation's
money supply and coordinating the banking system
-in the US, the central bank is the Federal Reserve
Classical theory of inflation - CORRECT ANSWER: States that in the long run, increases in the
money supply will lead to an increase in prices only
-can be illustrated using the AD/AS model
-connected to the quantity theory of money
Commodity backed money - CORRECT ANSWER: Any form of money that can be legally
exchanged into a fixed amount of an underlying commodity
-most common underlying commodity: gold
Contractionary monetary policy - CORRECT ANSWER: When money supply is decreased to
lower AD
Costs of predictable inflation (3) - CORRECT ANSWER: 1. Menu costs
2. Shoe-leather costs
3. Tax distortion
Costs of predictable inflation: Menu costs - CORRECT ANSWER: The money, time and
opportunity costs of changing prices to keep up with inflation
-ex: reprinting labels, reprogramming vending machines, updating websites, etc.
Costs of predictable inflation: Shoe-leather costs - CORRECT ANSWER: The time, money and
effort costs of managing cash in the face of inflation
, -with high predictable inflation it is better not to keep money in form of cash. The time and
efforts spent on frequent transfers of assets from one form to another represents shoe-leather
costs
Costs of predictable inflation: Tax distortion - CORRECT ANSWER: Refers to the fact that tax
laws only take into consideration nominal income, not what you can buy with it
-if the tax brackets are not adjusted frequently, inflation may push the income into a higher tax
bracket. While purchasing power stays the same, tax rate increases
Costs of unpredictable inflation (3) - CORRECT ANSWER: -Difficult to do business planning
because changes in prices of inputs are unpredictable
-Uncertainty makes it difficult to predict the real interest rate by the end of the year
-high unpredicted inflation redistributes wealth from savers to borrowers
Credit risk - CORRECT ANSWER: The risk of a borrower defaulting on a loan
Crowding out effect - CORRECT ANSWER: Increases in government spending crowds out
private investments
Debt (loan/bond) - CORRECT ANSWER: Loan is issued when a lender provides funds to a
borrower in exchange for future repayment of the amount loaned plus interest (generally less
risky and less rewarding than buying stock)
A bond is a form of debt where the bond issuer promises to repay the loan plus scheduled interest
payments (more liquid than a loan and are less risky/less rewarding compared to stocks)
Default - CORRECT ANSWER: Occurs when a borrower fails to pay back a loan according to
the loan terms
Deflation - CORRECT ANSWER: An overall fall in prices in the economy
2027 Exam 225 Questions with 100% Verified Correct
Answers Guaranteed A+
2 basic factors driving differences in interest rates - CORRECT ANSWER: 1. loan term - the
longer the term is, the higher the interest rate will be (lenders want to be compensated for the
opportunity cost)
2. the risk - the higher the risk of default by the borrower, the higher the interest rate
3 bank functions - CORRECT ANSWER: 1. serve as an intermediary
2. provide liquidity
3. diversify risk
3 functions of money - CORRECT ANSWER: 1. Store of value: money represents a certain
amount of purchasing power
2. Medium of exchange: money can be used to purchase goods and services
3. Unit of account: money provides a standard unit of comparison
3 major financial assets - CORRECT ANSWER: 1. Equity
2. Debt
3. Derivatives
4 major players in the financial system - CORRECT ANSWER: 1. Banks and other financial
intermediaries (commercial/investment banks)
2. Savers and their proxies (mutual funds, pension funds, life insurances companies, banks, etc)
3. Entrepreneurs and businesses
4. Speculators (anyone who buys and sells financial assets purely for financial gain)
,Bank functions: intermediation - CORRECT ANSWER: Bank serves as intermediary between
savers and borrowers. Bank connects the borrower to a wide range of people who have spare
funds.
Bank functions: liquidity provision - CORRECT ANSWER: Bank makes cash more readily
accessible when and where you want it
-no need to keep cash on hand
-ATMs, checkbooks and credit cards allow instant access to cash when it is needed
Bank functions: risk diversification - CORRECT ANSWER: Bank pools many borrowers and
lenders together, so individual saver does not bear the full burden of a failed investment
-a few borrowers will default their loans, but most will repay
Benefits of public debt - CORRECT ANSWER: 1. It allows the government to be flexible when
something unexpected happens
2. Government debt can pay for investments that lead to economic growth and prosperity
Borrowers (buyers) - CORRECT ANSWER: Want to spend funds on something valuable now
Examples:
-families buying houses
-students taking out loans to go to college
-corporations building new factories
-entrepreneurs starting new ventures
-government
Budget deficit - CORRECT ANSWER: The amount of money a government spends beyond its
revenue (expenditures > revenues)
,Budget surplus - CORRECT ANSWER: The amount of revenue a government brings in beyond
what it spends (expenditures < revenues)
Central bank - CORRECT ANSWER: The institution responsible for managing the nation's
money supply and coordinating the banking system
-in the US, the central bank is the Federal Reserve
Classical theory of inflation - CORRECT ANSWER: States that in the long run, increases in the
money supply will lead to an increase in prices only
-can be illustrated using the AD/AS model
-connected to the quantity theory of money
Commodity backed money - CORRECT ANSWER: Any form of money that can be legally
exchanged into a fixed amount of an underlying commodity
-most common underlying commodity: gold
Contractionary monetary policy - CORRECT ANSWER: When money supply is decreased to
lower AD
Costs of predictable inflation (3) - CORRECT ANSWER: 1. Menu costs
2. Shoe-leather costs
3. Tax distortion
Costs of predictable inflation: Menu costs - CORRECT ANSWER: The money, time and
opportunity costs of changing prices to keep up with inflation
-ex: reprinting labels, reprogramming vending machines, updating websites, etc.
Costs of predictable inflation: Shoe-leather costs - CORRECT ANSWER: The time, money and
effort costs of managing cash in the face of inflation
, -with high predictable inflation it is better not to keep money in form of cash. The time and
efforts spent on frequent transfers of assets from one form to another represents shoe-leather
costs
Costs of predictable inflation: Tax distortion - CORRECT ANSWER: Refers to the fact that tax
laws only take into consideration nominal income, not what you can buy with it
-if the tax brackets are not adjusted frequently, inflation may push the income into a higher tax
bracket. While purchasing power stays the same, tax rate increases
Costs of unpredictable inflation (3) - CORRECT ANSWER: -Difficult to do business planning
because changes in prices of inputs are unpredictable
-Uncertainty makes it difficult to predict the real interest rate by the end of the year
-high unpredicted inflation redistributes wealth from savers to borrowers
Credit risk - CORRECT ANSWER: The risk of a borrower defaulting on a loan
Crowding out effect - CORRECT ANSWER: Increases in government spending crowds out
private investments
Debt (loan/bond) - CORRECT ANSWER: Loan is issued when a lender provides funds to a
borrower in exchange for future repayment of the amount loaned plus interest (generally less
risky and less rewarding than buying stock)
A bond is a form of debt where the bond issuer promises to repay the loan plus scheduled interest
payments (more liquid than a loan and are less risky/less rewarding compared to stocks)
Default - CORRECT ANSWER: Occurs when a borrower fails to pay back a loan according to
the loan terms
Deflation - CORRECT ANSWER: An overall fall in prices in the economy
