problem_set_1(answers)

Problem_set_1(answer - Problem Set 1 Chapter01 1. a.Financialmarkets b.Centralbanks C.Creditcards d. 2.'seconomy a.

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Problem Set 1 Chapter 01 1. Identify which item is not one of the five parts of the financial system. a. Financial markets b. Central banks C . Credit cards d. Financial institutions 2. Investing in financial instruments in today's economy: a. Is an activity practiced only by the wealthy? b. Involves costly transactions c. Requires a relatively large sum of money to invest (more than $100,000) D . Is made easier by the use of mutual funds 3. The statement "risk requires compensation" implies that people: a. Do not take risk b. Only accept risk when they absolutely have to C . Will only accept risk when they are rewarded for doing so d. Avoid risk at all cost 4. Central banks can improve the welfare of a society by doing all of the following except : A . Serving the interests of government rather than the public at large b. Helping to promote economic growth c. Focusing on keeping the overall level of prices stable d. Helping to reduce the volatility of business cycles
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5. Which of the following statements best describes financial instruments ? a. All financial instruments are a means of payment b. Financial instruments can transfer resources between people but not risk C . Financial instruments can transfer resources and risk between people d. Financial instruments can transfer risk but not resources between people 6. When an individual obtains a car loan and makes all of the regular monthly payments, the sum of the payments made will exceed the purchase price of the car. This is due primarily to the core principle: a. Risk requires compensation b. Information is the basis for decisions c. Markets determine prices and allocate resources D . Time has value 7. Studying money and banking through five core principles is helpful because: a. Studies have shown students have a difficult time remembering more than five topics b. Everything in economics can be reduced to five core principles C . Money and Banking can undergo drastic changes overtime, but the five principles do not d. These five principles are understood by everyone 8. Identify the five core principles of Money and Banking. #1) Time has value; #2) Risk requires compensation; #3) Information is the basis for decisions; #4) Markets determine prices and allocate resources; #5) Stability improves welfare.
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9. Which core principle(s) could you use to explain why credit card issuers charge such high rates of interest? You could explain the high rates of interest from three principles. First, risk requires compensation, and certainly the credit card issuers are taking a risk when they let people use the cards. There is a risk that some users may not repay the credit card company. Second, you can also justify it from the principle that time has value. The borrowers are using the issuer's funds, and the issuer needs to be compensated for letting the borrower use these funds. Some borrowers do not repay for considerable periods of time. Third, you could also invoke the principle that people use information in making their decisions. Credit card issuers need to acquire information on each applicant before a card is issued
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This note was uploaded on 09/10/2008 for the course ECON 135 taught by Professor Rafiqulbhuyan during the Spring '08 term at UC Davis.

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Problem_set_1(answer - Problem Set 1 Chapter01 1. a.Financialmarkets b.Centralbanks C.Creditcards d. 2.'seconomy a.

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