Answers+to+Selected+Questions+and+Problems Homework+1

Answers+to+Selected+Questions+and+Problems Homework+1 -...

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Chapter 1 Why Study Money, Banking, and Financial Markets? 2. The data in Figures 1, 2, 3, and 4 suggest that real output, the inflation rate, and interest rates would all fall. 4. You might be more likely to buy a house or a car because the cost of financing them would fall, or you might be less likely to save because you earn less on your savings. 6. No. It is true that 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. 8. They channel funds from people who do not have a produc- tive use for them to people who do, thereby resulting in higher economic efficiency. 10. The lower price for a firm’s shares means that it can raise a smaller amount of funds, and so investment in facilities and equipment will fall. 12. It makes foreign goods more expensive, so British consumers will buy fewer foreign goods and more domestic goods. 14. In the mid- to late 1970s and in the late 1980s and early 1990s, the value of the dollar was low, making travel abroad relatively more expensive; thus it was a good time to vaca- tion in the United States and see the Grand Canyon. With the rise in the dollar’s value in the early 1980s, travel abroad became relatively cheaper, making it a good time to visit the Tower of London. Chapter 2 An Overview of the Financial System 1. The share of IBM stock is an asset for its owner, because it entitles the owner to a share of the earnings and assets of IBM. The share is a liability for IBM, because it is a claim on its earnings and assets by the owner of the share. 3. Yes, because the absence of financial markets means that funds cannot be channeled to people who have the most productive use for them. Entrepreneurs then cannot acquire funds to set up businesses that would help the economy grow rapidly. 5. This statement is false. Prices in secondary markets deter- mine the prices that firms issuing securities receive in pri- mary markets. In addition, secondary markets make securities more liquid and thus easier to sell in the primary markets. Therefore, secondary markets are, if anything, more important than primary markets. 7. Because you know your family member better than a stranger, you know more about the borrower’s honesty, propensity for risk taking, and other traits. There is less asymmetric information than with a stranger and less likeli- hood of an adverse selection problem, with the result that you are more likely to lend to the family member. 9. Loan sharks can threaten their borrowers with bodily harm
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This note was uploaded on 03/23/2011 for the course ECON 301 taught by Professor Hassan during the Spring '08 term at Rutgers.

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Answers+to+Selected+Questions+and+Problems Homework+1 -...

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