This document defines several key economic terms including money, banks, financial markets, monetary theory, inflation, business cycles, and interest rates. It discusses the importance of interest rates to the economy and how they can affect personal, business, and investment decisions. It elaborates that inflation is primarily a monetary phenomenon caused by increasing money supply and aggregate demand outpacing aggregate supply. The document also differentiates between stocks and bonds, discusses how financial markets channel funds from lenders to borrowers, and defines the concepts of asymmetric information, adverse selection, and moral hazard.

1. Mid Term Revision

2. Question1: Define the following
terms:
A- Money

3. Answer:Money— is defined as anything that is
generally accepted in the payment for
goods & services or in the payment of
debts.

4. B- Banks

5. Answer:Banks: Banks are financial institutions
that accept deposits and make loans.

6. C- Financial Markets

7. Answer:Financial Markets: Markets in which
funds are transferred from people who
have an excess of available funds to
people who have a shortage

8. D- Monetary Theory

9. Answer:Monetary Theory: the theory that relates
the change in the quantity of money to
changes in aggregate economic activity
& the price level

10. E- Inflation

11. Answer:Inflation: is the continuous increase in
the price level of goods & services in
an economy.

12. F- Business Cycle

13. Answer:Business Cycle: The upward &
downward movement of aggregate
output produced in the economy.

14. G- Interest Rate

15. Answer:Interest Rate: is the cost of borrowing
(or the return from lending.

16. Discuss The Following:

17. A- The importance of Interest Rate to
the economy.

18. Interest Rate is the cost of borrowing or the
return from lending.
I.R plays an important role on number of
levels:
On a personal level, high interest rate could
deter you from buying a house or a car
because the cost of financing it will be high.
On the other hand, high I.R could encourage
you to save because you can earn more
interest income by saving.

19. It also affects business investment decisions:
High I.R for example, might cause a corporation
to postpone building a new plant.

20. The main reason of inflation is a
monetary phenomenon. Elaborate

21. Inflation is the continuous increase in the
price level of goods & services in an
economy.
Inflation is a monetary phenomenon , it
occurs because of increasing aggregate
demand as a result of increasing the
quantity of money in the market, which
will lead to increase in the price level.

22. Money Supply
Expenditures
Aggregate
demand >
Aggregate Supply
Expenditure >
Production
Inflation

23. The direction of funds from the Lender to
Borrower in financial markets.

25. • The basic function of financial markets is to
channel funds from people who have an excess
of available funds to people who have a
shortage.
• Financial markets can do this either through
A) Direct finance: in which borrowers borrow
funds directly from lenders by selling them
financial instrument
B) Indirect finance: which involves a financial
intermediary who stands between the lender
savers and the borrower spenders and helps
transfer funds from one to the other

26. Differentiate between stocks & Bonds

27. Stocks
Bonds
a stock is a security that is a claim on the
earnings & assets of a corporation.
is a debt security that promises to make
payments periodically for specified period
of time.
Represent ownership
Represent borrowing
Stocks also called shares, equity
Holder of the stock is called stockholder
Holder of bond is a bondholder
Revenue received is dividends
Revenue is interest
Types of stock: common stock & preferred
stock
People prefer bonds than stocks because
its safer & less risky.
While companies also prefer bonds than
stocks because it represents debt on the
company, not ownership as stock.

28. Asymmetric Information

29. Occurs when buyers and sellers are not equally
informed about the true quality of what they buying
& selling.
Adverse selection
• Is the problem created by asymmetric information
before the transaction occurs .
• Adverse selection is related to information about a
business before the bank makes the loan.
• All small business tend to represent themselves as
high quality (that is, low risk) despite the fact that
bankers know.
• In the absence of information about exactly who is
good & who is bad, bankers face a problem.

30. Moral Hazard
• Occurs after a loan is made. Moral hazard in
financial markets occurs when borrowers have
incentives to engage in activities that are
undesirable (immoral from the lender point of
view)
• Moral hazard is a problem of asymmetric
information occurring after a loan is made.
• It arises because borrowers in secrecy engage
in activities that increase the probability of
poor performance.