Macro

Aaron Mitchell

Written Assignment 3

1. What is the role of the financial system? Name and describe two markets that are part of the financial system in the U.S. economy. Name and describe two financial intermediaries.

The role of the financial system is to match one persons saving’s with another person’s investment. Two markets are the bond market and the stock market. Two financial intermediaries are banks and mutual funds.

2. What is the government budget deficit? How does it affect interest rates, investment, and economic growth?

A government budget deficit is when government spending exceeds the revenue the government receives from taxation. Due to a government budget deficit, interest rates rise, investment decreases and economic growth decreases.

3. What benefit do people get from the market for insurance? What two problems impede the insurance market from working perfectly?

The benefit people get from the market insurance is peace of mind. The two problems that impede the insurance market from working perfectly are adverse selection, and moral hazard.

4. Describe the efficient markets hypothesis and give a piece of evidence consistent with this hypothesis. What does this say about using past price histories to predict future prices?

The efficient market hypothesis is the theory that asset prices reflect all publicly available information about the value of an asset, a piece of evidence consistent with this hypothesis is the performance of index funds. It says the correlation between how well stocks do one year and how well it does the following year is almost exactly zero.

5. What are the three categories into which the Bureau of Labor Statistics divides everyone? How does the BLS compute the labor force, the unemployment rate, and the labor force participation rate?

The three categories are employed, unemployed, and not in the labor force.

Labor force = number of employed + number of unemployed....