1. What is the typical relationship between interest rates on three-month Treasury bills, long-term treasury bonds, and Baa corporate bonds? The interest rate on three-month Treasury bills fluctuates more than the other interest rates and is lower on average. The interest rate on Baa corporate bonds is higher on average than the other interest rates.
2. What effect might a fall in stock prices have on business investment? The lower price for a firm’s shares means that it can raise a smaller amount of funds, and so investment in plant and equipment will fall.
3. What effect might a rise in stock prices have on consumers’ decisions to spend? Higher stock prices mean that consumers’ wealth is higher and so they will be more likely to increase their spending.
4. Why are financial markets important to the health of the economy? Because they channel funds from those who do not have a productive use for them to those who do, thereby resulting in higher economic efficiency.
5. What was the main cause of the recession that began in 2007? The main cause of the recession that began in 2007 was the defaults in subprime residential mortgages led to major losses.
6. What is the basic activity of banks? Banks accept deposits and then use the resulting funds to make loans.
7. What are other important financial intermediaries in the economy besides banks? Savings and loan associations, mutual savings banks, credit unions, insurance companies, mutual funds, pension funds, and finance companies
The Term Paper on Comparative Study of Mutual Funds and Bank Deposits
... your fixed deposits give high interest rates like 9-9. 5%, mutual funds are better. 3. Mutual funds and fixed deposits: Capital ... looking for steady returns. Funds beat banks Even as banks are luring investors with higher fixed-deposit rates, mutual funds seem to be steeling ... to Value; Give importance to Growth. Give importance to Price; these values are much more important statistics than Investment ...
8. Can you think of any financial innovation in the past 10 years that has affected you personally? Has it made you better or worse off? In what way?
9. Has the inflation rate in the U.S. increased or decreased in the past few years? What about the interest rates? The inflation rate in the U.S. increased in the past few years and the interest rates decreased.
10.If the history repeats itself and we see a decline in the rate of money growth, what might you expect to happen to a. real output? will increase b. the inflation rate? will decrease c. interest rates? will decrease
11. When interest rates decrease, how might businesses and consumers change their economic behavior? Businesses would increase investment spending because the cost of financing this spending is now lower, and consumers would be more likely to purchase a house or a car because the cost of financing their purchase is lower.
12. Is everybody worse off when interest rates rise? No. People who borrow to purchase a house or a car are worse off because it costs them more to finance their purchase; however, savers benefit because they can earn higher interest rates on their savings.
13. Why do managers of financial institutions care so much about the activities of the Federal Reserve System? Because the actions of the Federal Reserve affects interest rates, inflation, and business cycles, all of which have an important impact on the profitability of financial institutions.
15. How does a decline in the value of pound sterling affect British consumers? It makes foreign goods more expensive and so British consumers will buy less foreign goods and more domestic goods.
16. How does an increase in the value of the pound sterling affect American businesses? It makes British goods more expensive relative to American goods. American businesses will find it easier to sell their goods in the United States and abroad, and the demand for their products will rise. If, however, an American business depends on supplies/parts from British companies these products will increase their costs.
17. How can changes in foreign exchange rates affect the profitability of financial institutions? Changes in foreign exchange rates change the value of assets held by financial institutions and thus lead to gains and losses on these assets. Also changes in foreign exchange rates affect the profits made by traders in foreign exchange who work for financial institutions.
The Term Paper on Australian Exchange Rate Demand Foreign Dollar
... the past four months that have affected the value of the Australian dollar Exchange Rate: The rate at which one unit of domestic ... appreciation occurs, it lowers the domestic price of foreign goods and raises the foreign price of exports. DEPRECIATION The depreciation of ... Ross Git tins, says that the American dollar is vastly overvalued and the Australian dollar undervalued. He says this is an ...
18. According to Figure 8, in which years would you have chosen to visit the Grand Canyon in Arizona rather than the Tower of London? Where the dollar was weak 1991, 1993, 1995 etc. the Grand Canyon
19. When the dollar is worth more in relation to currencies of other countries, are you more likely to buy American-made or foreign-made jeans? When the dollar increases in value, foreign goods become less expensive relative to American goods; thus you are more likely to buy French-made jeans than American-made jeans. The resulting drop in demand for American-made jeans because of the strong dollar hurts American jeans manufacturers. On the other hand, the American company that imports jeans into the United States now finds that the demand for its product has risen, so it is better off when the dollar is strong.
20. Much of the U.S. government debt is held as treasury bonds and bills by foreign investors. How do fluctuations in the dollar exchange rate affect the value of that debt held by foreigners? Foreign holders of this debt are concerned that the U.S. will let the dollar value decline so the relative value of its debt is less. As the dollar loses value, investors are less likely to hold assets in dollars as they wait for the decline to stop.
