Solutions to Chs1-4

Solutions to Chs1-4 - Solutions to assigned problems...

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Solutions to assigned problems – Chapters 1-4. Ch. 1 4. No. those who borrow are worse off because it costs them more to finance their purchase; but savers benefit because they can earn higher interest rates on their savings. 8. It makes UK goods more expensive relative to American goods. US businesses find it easier to sell their goods in the United States and abroad, and the demand for their products rises. 9. Changes in foreign exchange rates change the value of assets held by FIs and so 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. 10. In the mid- to late 1970s and the early 1980s and early to mid 1990s, the value of the dollar was low, making travel abroad relatively more expensive; that would have been a good time to vacation in the US and see the Grand Canyon. As the dollar’s value rose in the mid 1980s, travel abroad became relatively cheaper, making it a good time to visit the Tower of London. 14. The profitability of financial institutions is affected by changes in interest rates, stock prices, and foreign exchange rates; fluctuations in these variables expose these institutions to risk. Ch. 2 2. Yes, take out the loan. My interest payment will be $4,500 (90% of $5,000), but then I can earn an additional $10,000, so I will be ahead by $5,500. Since Larry’s business can make some people better off, as in this example, loan sharking may have social benefits. (One argument against legalizing loan sharking, however, is that it is frequently involves violence against the knees!) 4. The principal debt instruments used were foreign bonds which were sold in the UK and denominated in pounds. The Brits gained because they earned higher interest rates by lending to Americans, and the Americans gained because they got access to capital to start up
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This note was uploaded on 09/08/2010 for the course BUS 171A at San Jose State.

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Solutions to Chs1-4 - Solutions to assigned problems...

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