LSU ECON 2035 EXAM 1 And Exam 2
Review Questions with Complete
Solutions 2026 Updated.
Three key components of the financial system - Answer financial assets, financial institutions,
the federal reserve
relationship between bond prices and yield to maturity - Answer inverse
Nominal Interest rates - Answer interest rates that are not adjusted for changes in
purchasing power
Real interest rates - Answer interest rates that are adjusted for changes in purchasing power
TIPS: Treasury Inflation Protected Security - Answer a type of bond that is adjusted for
inflation
Functions of money in the economy: 5 key functions - Answer means of payment, unit of
account, store of value, standard of value, standard of deferred payment
b. Unit of account - Answer Money is used as a written record of transactions/prices
(receipt; in non-literate society: no unit of account).
Money and wealth are _____ variables - Answer stock
Income is ____ variable - Answer flow
Checks - Answer promises to pay on demand money deposited with a bank or other financial
institutions
M1 - Answer • coins and currency in circulation
• checking accounts
• travelers checks
M2 - Answer • Everything in M1 +
, • Saving accounts
• Small denomination time deposits: small certificates of deposit (CDs) (less than $100,000)
• Money market account balances
• Non-institutional money market mutual fund shares (private investors)
• Quantity theory of money - Answer is a theory about the connection between money and
prices that assumes that the velocity of money is constant.
Bonds - Answer a financial security issued by a corporation or a government that represents
a promise to repay a fixed amount of money
Securitized loans - Answer the process of converting loans and other financial assets that are
not tradable into tradable securities
Financial intermediary - Answer a financial firm that borrows funds from savers and lends
them to borrowers
Shadow banks - Answer investment banks, insurance companies, pension funds, mutual
funds, hedge funds
risk averse - Answer choose the asset with the lower risk when two assets have the same
expected returns - resulting in tradeoffs between risk and return
Most common
Risk-loving - Answer investors prefer to hold risky assets with the possibility of maximizing
returns
Risk-neutral - Answer investors make decisions on the basis of expected returns, ignoring risk
Market (Systematic) risk - Answer risk that is common to all assets of a certain type
i. Ex. Changes in stock returns as a result of the business cycle
Idiosyncratic (Unsystematic) risk - Answer risk that pertains to a particular asset
Factors that affect the demand for bonds - Answer • Wealth
• Expected rate of return
• Expected inflation
Review Questions with Complete
Solutions 2026 Updated.
Three key components of the financial system - Answer financial assets, financial institutions,
the federal reserve
relationship between bond prices and yield to maturity - Answer inverse
Nominal Interest rates - Answer interest rates that are not adjusted for changes in
purchasing power
Real interest rates - Answer interest rates that are adjusted for changes in purchasing power
TIPS: Treasury Inflation Protected Security - Answer a type of bond that is adjusted for
inflation
Functions of money in the economy: 5 key functions - Answer means of payment, unit of
account, store of value, standard of value, standard of deferred payment
b. Unit of account - Answer Money is used as a written record of transactions/prices
(receipt; in non-literate society: no unit of account).
Money and wealth are _____ variables - Answer stock
Income is ____ variable - Answer flow
Checks - Answer promises to pay on demand money deposited with a bank or other financial
institutions
M1 - Answer • coins and currency in circulation
• checking accounts
• travelers checks
M2 - Answer • Everything in M1 +
, • Saving accounts
• Small denomination time deposits: small certificates of deposit (CDs) (less than $100,000)
• Money market account balances
• Non-institutional money market mutual fund shares (private investors)
• Quantity theory of money - Answer is a theory about the connection between money and
prices that assumes that the velocity of money is constant.
Bonds - Answer a financial security issued by a corporation or a government that represents
a promise to repay a fixed amount of money
Securitized loans - Answer the process of converting loans and other financial assets that are
not tradable into tradable securities
Financial intermediary - Answer a financial firm that borrows funds from savers and lends
them to borrowers
Shadow banks - Answer investment banks, insurance companies, pension funds, mutual
funds, hedge funds
risk averse - Answer choose the asset with the lower risk when two assets have the same
expected returns - resulting in tradeoffs between risk and return
Most common
Risk-loving - Answer investors prefer to hold risky assets with the possibility of maximizing
returns
Risk-neutral - Answer investors make decisions on the basis of expected returns, ignoring risk
Market (Systematic) risk - Answer risk that is common to all assets of a certain type
i. Ex. Changes in stock returns as a result of the business cycle
Idiosyncratic (Unsystematic) risk - Answer risk that pertains to a particular asset
Factors that affect the demand for bonds - Answer • Wealth
• Expected rate of return
• Expected inflation
